“If you don’t think the economy is going to be in a substantial slowdown or recession, the prices are undervalued. If you do think we are going into a global slowdown, the prices have probably more room to fall,” Flynn explained.

“I lean more towards the fact that the market is overdone. We’re going to bottom out shortly,” he added, noting that he expects world supplies to tighten in 2024.

Until then, Flynn said the oil market was suffering from “high anxiety” due to the amount of volatility. One case in point was Saudi Arabia cutting its price for oil on Jan. 8, which saw values for Brent and West Texas Intermediate crude oils get hit hard.

In the same breath, he pointed to the risk to supplies that’s added some cost to oil. Namely the attacks on commercial shipping in the Red Sea being carried out by Iran-supported Houthi rebels in Yemen.

“But the reality is we haven’t seen any major oil disruptions. We haven’t lost too many barrels of oil because of this. Admittedly, [shipments] have been delayed around the Red Sea has added to the cost.

Flynn said there were widespread expectations the price of oil would have jumped with the start of the Gaza war and fears the conflict would spread throughout the Middle East. But such has not occurred so far.

He also pointed to the annual “rebalancing of the commodity index funds” with Bloomberg commodity index and the S&P Goldman Sachs index.

“When they rebalanced those indexes, they had to sell some oil. That put further downward pressure on prices,” Flynn said.

He said the hedge funds built a near-record short position in crude oil, which weighed on values.

“They’re betting on a recession. They keep selling in every rally in oil. They are doom and gloom, and they keep pushing the market lower,” Flynn commented.

“On the flip side of that, if they’re wrong, you can see a major reversal in price,” he added, noting colder temperatures will push up the demand for diesel and natural gas.

— Glen Hallick reports for MarketsFarm from Winnipeg. 

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U.S. refining capacity has declined in the last two years, as plants shut during the outset of the coronavirus pandemic, causing prices to spike. Several plants are being converted to facilities that can produce cleaner-burning renewable diesel, but at least for now, those facilities will not fully replace those refined barrels.

There are at least 12 renewable diesel projects worth more than $9 billion under construction, with another nine proposed (all figures US$). The 12, along with existing plants, are expected to produce about 135,000 barrels per day (bpd) of renewable diesel by 2025 according to EIA data, from around 80,000 bpd now.

However, since 2019, diesel production capacity has dropped by about 180,000 bpd total, according to the U.S. Energy Information Administration, and at least one more U.S. refinery is set to close next year, further reducing output. In addition, those refiners set to produce renewable diesel will also no longer produce gasoline or jet fuel.

Globally, about 400,000 bpd of combined diesel, jet fuel and fuel oil capacity has been lost since 2019, according to calculations from EIA data.

Renewable diesel is made from animal fats, food wastes and plant oils but is chemically equivalent to petroleum-based diesel. It can be produced in existing refinery equipment, but the yield are lower than with diesel. Biodiesel, another plant based diesel, must be mixed with petroleum to operate effectively in engines.

Growing demand and refinery losses have pushed diesel prices to record levels. The retail price of U.S. diesel has surged 80 per cent this year to $5.78 a U.S. gallon, and low inventories have raised the potential for shortages. U.S. stocks of distillates, including diesel, are down 19 per cent from a year ago.

About 1 million bpd of new petroleum refining capacity is planned in the next five years in Asia, the Middle East and on the U.S. Gulf Coast. But experts say startups are difficult to predict due to construction delays, changes in market demand and financing.

Biodiesel pivot

U.S. refiners joined the renewable fuels bandwagon two years ago as the pandemic slashed fuel demand and environmental pressures led several to choose de-carbonizing over shuttering facilities.

Marathon Petroleum’s 166,000 bpd Martinez, California refinery and Phillips 66’s 120,200 bpd Rodeo refinery, also in California, converted to renewable diesel facilities. Combined, they will produce 100,000 bpd of renewable diesel by 2023.

HF Sinclair converted a 52,000-bpd Cheyenne, Wyoming, refinery to produce 6,000 bpd of renewable diesel. The former Come-by-Chance refinery in Newfoundland aims to begin producing 18,000 bpd of renewable fuels by 2024.

“These projects should bring incremental barrels in the next few years, but not now when they would be more needed,” said Ravi Ramdas, managing director of energy consultancy Peninsula Energy.

Renewable fuel profits have been bolstered by states, led by California’s Low Carbon Fuel Standard, that reward producers with tradable credits for producing renewable fuels.

However, the credits are now trading at about $80 per ton, down from $200 per ton in 2020, when the majority of these projects were proposed. Still, U.S. refiners say they are not backtracking on renewable diesel projects.

The cost of vegetable oils used to make renewable diesel also has shot up following Russia’s invasion of Ukraine. Soybean oil, a popular refinery feedstock, is up 40 per cent year-over-year, while crude oil is up more than than 60 per cent in that time.

— Laura Sanicola reports on the U.S. energy sector for Reuters from Washington, D.C.

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Wall Street tumbled as fears of economic damage intensified with the global tally of cases crossing 100,000. Financial markets view the virus, which causes a flu-like illness, as the catalyst that could interrupt the longest economic expansion on record, now in its 11th year.

Futures prices for corn, which is used to make ethanol, faced additional pressure from the their link to energy markets, traders said. Oil prices tanked over eight per cent and hit their lowest since mid-2017.

“The outside markets are causing a risk-off type of trade,” said Don Roose, president of Iowa-based agricultural broker U.S. Commodities. “There’s no doubt about it.”

The most actively traded corn futures contract lost 1.4 per cent to close at $3.76 a bushel at the Chicago Board of Trade (all figures US$). Soybeans slipped 0.8 per cent to $8.91-1/4 a bushel. The most-active wheat contract dropped one per cent to $5.15-3/4 a bushel at the CBOT.

Traders and analysts said prices could continue to weaken.

“We have virus fears back in the market and I think that it will get worse before it gets better,” said Ole Houe, director of advisory services at brokerage IKON Commodities.

The U.S. Department of Agriculture said on Friday it postponed a trade mission to Morocco because coronavirus was detected there.

More than 3,200 people worldwide have died from the respiratory illness. The Asian Development Bank said the outbreak is set to trim economic growth in developing Asia and around the world this year.

Traders are continuing to wait for China to ramp up purchases of U.S. agricultural goods, as it pledged to do in an initial trade deal signed in January.

China, the world’s top soybean importer, has granted tariff exemptions for some crushers to import U.S. soybeans, five sources told Reuters. However, Chinese importers are buying soybeans from Brazil, where prices are cheaper than in the United States, traders said.

“They’ve got these duty-free licenses, and so far it’s hands in their pockets,” Roose said.

China has also granted tariff exemptions for some importers to buy U.S. sorghum, wheat and distillers’ dried grains (DDGs), among other products, traders said.

The USDA reported that private exporters sold 234,688 tonnes of U.S. corn to Japan and 211,336 tonnes to unknown destinations.

The agency is set to release monthly supply and demand data on Tuesday.

— Reporting for Reuters by Tom Polansek in Chicago; additional reporting by Naveen Thukral in Singapore.

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As part of an effort to effect regime change in Venezuela, U.S. President Donald Trump announced this week he wants to place sanctions on the South American country’s oil industry.

The U.S. is at odds with Nicolas Maduro, who was recently sworn in for a second term as Venezuela’s president following elections that were deemed by the international community as fraudulent. The U.S. and several other countries, including Canada, recognized Juan Guaido, the leader of Venezuela’s National Assembly, as the country’s interim president.

The U.S. has long been a major importer of oil from Venezuela as its heavy crude is preferred for producing diesel fuel.

Should those sanctions take effect and as the U.S. looks to other sources for heavy crude, Canada will be at a disadvantage, according to Tom Koza of the Oil Price Information Service in New Jersey.

“You (Canada) got a lot of heavy oil, but you don’t have the logistics… to get it to the U.S. Gulf Coast,” Koza said, adding the railways should benefit from any increased crude oil exports to U.S. refineries.

And with those refineries demanding heavy crude he was still optimistic of Western Canadian Select crude oil making its way south in larger quantities.

Until the specifics of the sanctions are known, Gary Mar, president of the Petroleum Services Association of Canada, is skeptical of what might happen because of the U.S. president.

“Trump tweets without much regard for consequences or he changes his mind,” Mar stated.

He pointed to the U.S. sanctions on Iranian oil, which came with numerous waivers that to him made those sanctions rather meaningless. At this point it’s uncertain if Trump will include waivers on Venezuelan oil.

“That’s a political issue that’s hard to predict. The U.S. president often makes decisions without detailed advice being given to him,” Mar commented.

Of the 3.3 million barrels of oil a day Canada exports, he pointed out that approximately 10 per cent is by rail. Also the Province of Alberta’s plans to add enough rail cars to move another 120,000 barrels a day will take one to two years to implement.

Although Koza is confident that U.S. sanctions on Venezuelan oil “won’t be a global inflation event” there’s something else on the horizon that will drive up world diesel prices in about a year’s time regardless of where it was produced.

“Next year (the refineries) may not want a lot of heavy crude oil because it comes with a lot of sulphur. That high-sulphur fuel, which now goes into powering (ocean-going) vessels is going to be illegal to use in January 2020,” Koza said.

Until then consumers very likely won’t see any increases in diesel prices.

— Glen Hallick writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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“We’re going to see volatility throughout the year obviously but when we look at that season, or the full year average, we’re looking for it to be right around that 75 cents,” said Craig Klemmer, principal agricultural economist at FCC.

FCC bases its prediction on oil price forecasts and interest rate spreads between the U.S. and Canada. Of late, oil has been on the upswing, due to production cuts from the Organization of Petroleum Exporting Countries (OPEC).

“On the downside of the oil side of the complex, the Canadian economy, economic growth, U.S. growth for the economy looks to be slowing down a little bit and that’s going to put some downward pressure as we move throughout the year,” Klemmer said.

The Bank of Canada has lowered its expectation for rate increases, and FCC forecasts for one to two rate increases this year. For the U.S., FCC also expects more rate increases, either two or three.

Global trade could also affect the dollar. When looking south of the border, Klemmer said, FCC pays close attention to the trade talks between the U.S. and China and what affect that could have on global trade.

“We’re going to continue to be monitoring how those relationships are through 2019. And we do see a thawing in that relationship and that’s going to help the markets out moving forward in 2019,” he said.

The Canadian dollar could also see some pressure from the rate of the growth of the U.S. and Canadian economies. FCC is expecting the U.S. economy to grow slightly faster than the Canadian economy, at two to 2.5 per cent.

In Canada, the Bank of Canada expects for inflation to hit its two per cent mid-point target.

When looking at agriculture specifically, the slightly weaker Canadian dollar should be good for the industry. Canada’s agriculture industry is export-driven, with most business done in U.S. dollars.

“That’s going to give us a little of a competitive advantage on the returns for our pork and beef exports, as well as our grain and oilseed and pulse exports, and those will help to improve, or help support Canadian agriculture,” Klemmer said.

— Ashley Robinson writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting.

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“We think the market’s getting kind of overdone down here and this might be your best chance…if we do get a cold winter I think we’ll see these prices really pop,” said Phil Flynn of The Price Futures Group in Chicago, Ill.

Crude oil prices have been down lately. On Nov. 5 Brent crude closed at US$72.16 per barrel and West Texas Intermediate crude at US$62.52. Both oil benchmarks have slid more than 15 percent since hitting four-year highs in early October.

However, even with oil prices on the downswing, Flynn said there should be concern about diesel prices. Supply has been tightening globally, which could lead to a price spike.

“As of last week I think (the United States oil stocks were) five per cent below the five-year average and there’s a lot of concern that if we get a really cold winter it’s going to be difficult to meet that demand and get caught up,” he said.

China is also facing a tightening supply, according to Flynn. Latest news out of the country has the Chinese government telling the western provinces to ramp up purchases of diesel and heating fuel for the winter. China has faced supply shortages in the past and the government is trying to lower the chances of that happening again.

There have also been reports out of Russia that they are thinking of putting export duties on oil because they’re concerned about their distillate fuel supplies heading into the winter.

According to Flynn, this all leads to there being an overall bullish backdrop for diesel prices.

While gas prices have been lower than diesel prices lately on the Prairies, consumers shouldn’t be expecting diesel prices to come down, according to Flynn.

“If you look at the supplies of gasoline, they’re really above average for this time of year. Even though demand has been relatively strong, diesel fuel is below average and that’s why you’re seeing that discrepancy,” he said.

While the U.S. sanctions against Iran have been making news headlines in regards to oil prices, Flynn doesn’t think this has been affecting diesel markets much due to 180-day exemptions the U.S. has placed on eight importers who work with Iran.

“Right now the market seems to be dismissing those because of the waiver and I think one of the reasons they had to give waivers is because of the tightness of distillate,” Flynn said.

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Traditionally, ethanol is cheaper than gasoline, which encouraged processors to blend more than the mandated amount, according to Andrea Kent, president of the Canadian Renewable Fuels Association (CRFA).

“When you look at low gasoline prices now, that price advantage for ethanol really really shrinks,” she said.

That means blenders will meet the mandated five per cent ethanol requirement, but have less incentive to blend at seven or 7.5 per cent, which they normally do when it’s financially advantageous, Kent said.

Biofuel production is a demand driver in the agricultural market, as corn is an ingredient in ethanol production, while soybeans are used in biodiesel, so reduced demand for biofuel trickles down to the agricultural sector.

“Biofuel production is obviously a big driver for corn, soybean and other grain markets,” Kent said.

“Amid lower oil prices you see that kind of low biofuel use can kind of trickle down and have an impact on the farm level as well.”

The impact of reduced opportunistic blending has been mitigated somewhat by policies that mandate a certain amount of biofuel use in Canadian fuels — five per cent for ethanol, and two per cent for biodiesel.

The CRFA is trying to get the mandated amount of biodiesel in diesel fuel up to five per cent by 2020.

— Jade Markus writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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Crush margins provide an indication of the profitability of the product values relative to the seed cost when processing canola, with exchange rates also factoring into the equation.

As of Thursday, the Canola Board Crush Margin calculated by ICE Futures Canada was at about $80 above the January contract, which compares with levels closer to $48 a month earlier.

The January canola contract has seen some choppy activity over the past month, but was trading at roughly the same levels by Thursday as it was during the first week of November.

However, vegetable oil markets climbed sharply over the period, with CBOT soyoil improving by roughly three cents/lb. in recent weeks. Meanwhile, the Canadian dollar has lost nearly two cents relative to its U.S. counterpart over the past month, to trade below US75 cents.

The domestic crush pace was already running ahead of the year-ago level before the latest improvement in margins, and the improved profitability should help that trend continue.

As of Nov. 25, Canadian canola processors had crushed 2.486 million tonnes of canola during the crop year to date, which compares with 2.269 million at the same point the previous year, according to data from the Canadian Oilseed Processor Association.

— Phil Franz-Warkentin writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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JAPAN CUTS INDUSTRIAL PRODUCTION, ECONOMIC OUTLOOK – The Japanese government downgraded its assessment of industrial production and identified some areas of weakness in a monthly government report released on Wednesday.

The reduced forecast for industrial production is due to weaker demand from Asian emerging economies.

Additionally, the government downgraded its overall assessment of the economy for the second consecutive month.

GERMANY CUTS FORECAST FOR ECONOMIC GROWTH – Germany has reduced its forecast for this year’s economic growth, but only slightly.

The government pegged inflation at 1.7 per cent compared with the previous forecast of 1.8 per cent.

The slowdown has been attributed to weaker emerging economies, but gains in consumer spending helped offset some losses.

AGRICULTURAL GROUP BUYS EIGHT U.S. SEED COMPANIES – An agricultural distribution company has bought eight seed companies in the U.S..

Pinnacle Agriculture Holdings, LLC, purchased eight regional seed companies throughout Nebraska, Iowa, Illinois and Minnesota.

Pinnacle will be operating the businesses as part of the AgVenture, Inc.

OIL FUTURES GAIN, BUT OUTLOOK IS GRIM – Oil neared US$49 a barrel on Wednesday, as some market watchers, including OPEC leaders expect the global supply glut to ease soon.

However, the International Energy Agency has said they expect demand for the commodity to slow in 2016, and Iranian production to increase.

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“In Canada, it’s a little bit less clear-cut. And the reason is our energy sector is much larger as a share of the overall Canadian economy. So there is more uncertainty,” said Paul Ferley, assistant chief economist with RBC.

The Bank of Canada has previously characterized falling oil prices as “unambiguously negative,” but now seems to be backing away from that view a bit, Ferley told the Canola Council of Canada’s convention in Banff last Wednesday.

“Recent comments have sort of acknowledged that there are positives that come out of these oil price shocks. And that could help temper the hit to the energy sector.”

Lower oil prices have been a net benefit to the U.S. economy, which in turn should benefit Canadian exporters, he explained.

The Canadian dollar’s dip should enhance that effect, he added; RBC expects to see exporters, including manufacturers, respond by increasing export growth.

“And so we’re less pessimistic in terms of the Canadian outlook,” he said.

Dropping oil prices also imply lower gas prices, Ferley added, comparing the savings to a “major tax cut for Canadian households.”

The question, he said, is whether consumers spend those fuel savings, boosting the economy.

RBC doesn’t expect to see government spending to stimulate the economy. The bank also expects housing investments to flatten.

The bank is counting on strengthening exports and more consumer spending to help offset weaknesses in investment, especially in energy, he said.

Others, he noted, are less optimistic about Canada’s economic outlook over the next couple of years.

“The Bank of Canada has made comments that suggest that they’re not sure that the manufacturing sector can take advantage of (the situation),” said Ferley. “They’ve been downsizing so aggressively in past years that they don’t really have the productive capacity to respond.”

Exporters, he said, have already started to respond to these incentives.

Since 2012, Canadian exports have underperformed relative to growth in the U.S. economy, Ferley told council delegates, and it’s suspected that the Canadian dollar’s move toward parity was part of the reason for that underperformance.

The gap started to close last year, as the Canadian dollar dropped, he added.

Productivity

In the medium term, an aging workforce is an issue for the Canadian economy, Ferley said. “If you have fewer people working, and more people drawing on some of those (social) benefits, the math starts looking pretty ugly.”

Higher productivity, driven by technology, is one way to counteract the demographic slump. Productivity data can be volatile, he said, but there’s anecdotal evidence that Canada is making inroads.

As an example, Ferley cited the 2013 bin-buster — which was partly driven by innovation in the ag sector.

RBC’s relatively optimistic economic outlook also acknowledges certain risks — for example, that stronger exports and consumer spending in Canada may not emerge, or that the U.S. recovery may falter for some reason, which in turn “spells bad news for Canadian exporters,” he said.

A sharper correction in the Canadian housing market is the third risk, he said. Although the housing market is “still a little bit frothy,” in Ferley’s opinion that risk has “a fairly low probability.”

— Lisa Guenther is a field editor for Grainews based at Livelong, Sask. Follow her @LtoG on Twitter.

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