U.S. inventories of distillate fuel oil fell to 106 million barrels in early October, the lowest seasonal level since the government began collecting weekly data in 1982. EU distillate inventories were just 360 million barrels at the end of September, the lowest seasonal level since 2004. Singapore mid-distillate inventories have fallen to just eight million barrels, the lowest seasonal level since 2007.

[RELATED] Surge in U.S. renewable diesel supply won’t offset loss of petroleum diesel

The global petroleum and refining system has proved unable to keep up with rapid growth in fuel consumption as a result of the manufacturing and freight-led recovery after the coronavirus pandemic.

The immediate bottleneck is the lack of enough distillation and catalytic cracking capacity to make middle distillates from crude.

The world’s two largest refinery systems are both producing less distillate fuel than before the pandemic erupted. U.S. refinery closures brought on by the pandemic, equipment failures and the planned shift to electric vehicles have left insufficient capacity to meet both domestic and rising export demand. U.S. refineries produced an average of 4.9 million barrels per day of distillate fuel oil in 12 months ending July 2022, down from 5.2 million in the same period three years earlier.

[RELATED] It’s good to be green — canola cleared under new ‘clean fuel’ regulations

China’s refineries have also scaled back crude processing as the country struggles with the economic disruption caused by repeated city-level lockdowns to control the epidemic.

China produced 115 million tonnes of diesel in the first eight months of 2022, down from 119 million in the same period of 2018, according to the National Bureau of Statistics.

Some western policymakers have called on China to relieve the distillate shortage by boosting crude processing and resuming fuel exports. The country recently issued new export quotas to allow more fuel to be sent abroad.

But diesel accounts for only 30 per cent of the output of China’s refineries. The rest is gasoline (26 per cent) along with lesser amounts of naphtha, fuel oil, petroleum gases, asphalt, coke and kerosene.

Processing significantly more crude to meet the export demand for distillate would likely leave the refinery system with excess inventories of other products.

In any event, accelerating refinery processing will simply push the shortage upstream from the fuel market to the crude market.

Brent’s six-month calendar spread has been trading in a backwardation of more than US$8 per barrel, in the 98th percentile for all trading days since 1990, a sign of how tight the crude market is already.

U.S. crude stocks including the government’s strategic reserve have fallen to the lowest level since 2002, according to data from the U.S. Energy Information Administration.

There is not enough crude available to satisfy a big increase in demand from the refiners in China without depleting inventories further and sending prices higher.

This is the context in which U.S. officials told their Saudi counterparts there was “no market basis to cut production targets” before October’s OPEC+ meeting, according to the U.S. National Security Council.

In the absence of major new additions of crude production and refinery capacity, the only path to market rebalancing is through a sharp deceleration in fuel consumption to stabilize and then rebuild distillate inventories.

Distillates are overwhelmingly used in manufacturing, freight transport, farming, mining, forestry and oil and gas extraction, so consumption is driven primarily by the economic cycle rather than prices.

The need for a major reduction in consumption from trend implies a relatively severe downturn in the business cycle across North America, Europe and Asia.

The U.S. Federal Reserve cannot drill oil wells or build new refineries, but it can reduce fuel consumption by raising interest rates and inducing a broader slowdown in the domestic economy and major trading partners.

U.S. interest rate traders anticipate the Fed will raise its target for the interbank federal funds rate to 4.75 to 5 per cent before the end of March, up from 3 to 3.25 per cent now.

If realized, the forecast increases would take U.S. interest rates to the highest since October 2007, immediately prior to the onset of a recession that December.

The U.S. Treasury yield curve between two- and 10-year securities is more inverted than at any time since March 2000 and before that February 1982, both of which were associated with the onset of recessions.

The World Bank, International Monetary Fund, World Trade Organization and United Nations Conference on Trade and Development have all recently warned that a severe slowdown is likely in 2023.

But with spare capacity almost exhausted, a recession is the most likely route to rebalancing the distillate market in particular and the petroleum market in general.

– John Kemp is a Reuters market analyst. The views expressed are his own.

The post Opinion: It’s not just oil production that’s keeping diesel prices high appeared first on Alberta Farmer Express.

The result has been a surge in prices refiners receive for selling fuels compared with prices they pay for buying crude and other feedstocks, boosting their profitability significantly.

• ‘Petro-plectic’ anger rises toward fuel prices

In the United States, refiners currently receive roughly an average of more than $150 per barrel (all figures in U.S. dollars) from the sale of gasoline and diesel at wholesale prices, while paying only around $100 to purchase crude.

The indicative 3-2-1 margin of $50 per barrel is based on the assumption a refinery produces two barrels of gasoline and one barrel of diesel from refining three barrels of crude.

The margin is meant to be representative for an ‘average’ refinery and is a gross figure out of which refiners have to pay for labour, electricity, gas, hydrogen, catalysts, pipeline transport and the cost of capital.

Net margins are narrower and refinery costs have been rising rapidly as a result of widespread inflation ripping through the economy following the coronavirus pandemic.

Nonetheless, even allowing for rising input costs, gross margins have more than doubled from $20 at the end of 2021, ensuring refiners have a strong financial incentive to maximize crude processing and fuel production.

Gross margins are currently higher for making diesel (almost $60 per barrel) than for gasoline ($45 per barrel) reflecting the relative shortage of middle distillates.

U.S. distillate fuel oil stocks are 31 million barrels (23 per cent) below the pre-pandemic five-year average compared with a deficit of only six million barrels (three per cent) in gasoline.

The squeeze on fuel inventories and refinery capacity is compounding already high prices for crude caused by sanctions on Russia and output restraint by OPEC+ and U.S. shale producers.

The resumption of international passenger aviation as quarantine restrictions are lifted is tightening the fuel market even further because jet fuel is broadly similar to diesel and gas oil.

The effective wholesale price of diesel has climbed to over $160 per barrel while gasoline is trading at over $150, based on futures for delivery in New York Harbor.

Once distributors’ and retailers’ margins and taxes are included, the average price at the pump paid by motorists has climbed to $236 per barrel for diesel and $186 per barrel for gasoline.

The refining margins and fuel prices cited in this column are all for the United States but the same shortage of refining capacity and fuel inventories is boosting diesel prices elsewhere, and dragging up gasoline prices with them.

There is scope for refiners to increase fuel production by postponing non-essential maintenance and running refineries flat out into the early autumn. And also some room to adjust the output mix by switching from maximum gasoline to maximum diesel mode in downstream processing units.

But any increase in diesel production is unlikely to be able to reverse the depletion of inventories fully and return them to pre-pandemic levels. Prices will therefore have to continue rising until they begin to restrain consumption or the economy enters a cyclical downturn.

Consumers can reduce fuel use in the short term by consolidating freight loads (fewer voyages, flights and deliveries), reducing speeds (slower voyaging, flying and driving) and eliminating engine idling.

But the fuel savings are relatively modest and tend to degrade service levels, reduce capacity and increase capital costs.

By contrast, a slowdown in the business cycle delivers large simultaneous reductions in diesel use — absolutely or relative to trend — by freight firms, manufacturers, miners and construction firms.

Business cycle slowdowns have therefore tended to be the main path by which the distillate market and other fuel markets have rebalanced in the past.

The adjustment process is probably underway in 2022. The cyclical slowdown and reduced fuel demand could occur in one, two or all three of the major consuming regions.

Parts of China’s economy appear to be in recession already as coronavirus lockdowns paralyze factories and transport systems and depress consumer spending.

Europe’s economy is on the verge of recession as Russia’s invasion of Ukraine, the sanctions imposed in response, soaring energy prices and rampant inflation disrupt manufacturing and depress household spending.

The only major economy with significant momentum is the United States, but there, too, the rate of expansion is slowing, which will likely result in slower growth in distillate consumption later in the year.

– John Kemp is a Reuters market analyst. The views expressed are his own.

The post Opinion: It’s not just oil prices — refining capacity is driving up fuel bills appeared first on Alberta Farmer Express.

The Commodity Futures Trading Commission (CFTC) said Tuesday it will not publish the commitments of traders and other market reports during the shutdown, depriving participants in the world’s biggest derivative markets for energy and agricultural products of price-moving information about the positions of other producers, consumers and speculators.

The Energy Information Administration (EIA) has sufficient funds carried over from the last fiscal year to keep operating and will publish weekly data on physical oil and gas supplies for the time being, but the agency’s funding will run out around Oct. 11, according to officials, at which point publication will have to cease.

Of 365 senior officials, other staff and contractors employed at the EIA, only three are excepted from the furlough and will not be sent home once the money runs out, according to the shutdown plan published on the Department of Energy’s website.

At the CFTC, out of 680 employees, just 28 are excepted, enough to provide “a bare minimum level of oversight and surveillance,” as well as some whistleblower functions not funded by annual appropriations, according to the shutdown plan the commission sent to the White House Office of Management and Budget.

The extent to which commodity markets rely on federal data is hard to exaggerate. Weekly and monthly data on energy supplies, demand and stocks from the EIA regularly move derivative prices and provide some of the most important real-time context for oil markets worldwide.

The CFTC’s information about the positioning of market participants is less immediately price-sensitive but helps shape strategy for both hedgers and speculators across many energy and agricultural markets worldwide.

All of this is now at risk. The federal government’s entire commodity data publication programme will cease if the shutdown lasts more than about ten days. At that point, the market will trade in a partial information vacuum.

Markets thrive on hard data — as well as rumours, speculation and differences of opinion. An information vacuum will tilt the balance between market participants in ways which could sharply reduce trading volumes.

In particular, while some of the larger market participants dealing actively in physical commodities (“insiders”) may remain confident about trading financial derivatives too, based on their information about the underlying flows, less well-connected participants (“outsiders”) may conclude the information asymmetry is too large and decide to scale back or not trade at all, severely curbing liquidity.

— John Kemp is Reuters’ senior market analyst for the commodities and energy sectors and writes from London, England. Opinions expressed are his own.

The post Kemp: Commodity markets will go dark if U.S. shutdown continues appeared first on Alberta Farmer Express.

Groundwater resources have shrunk by 1,000 cubic kilometres since 1900 — about double the total amount of water contained in Lake Erie.

And depletion rates are accelerating. The 40 aquifers in the survey declined almost 200 cubic kilometres between 2000 and 2008 alone — more than twice the depletion rate of the 1980s and ’90s.

The giant High Plains or Ogallala aquifer, which underlies about 450,000 square kilometres of Texas, New Mexico, Oklahoma, Kansas, Colorado, Nebraska, Wyoming and South Dakota, has lost more than 340 cubic kilometres of water since the beginning of the 20th century.

In the worst-affected parts of northern Texas, the water table in the High Plains aquifer has fallen by more than 150 feet.

Environmentalists blame water-intensive hydraulic fracturing for adding to the stress in drought-hit areas. But groundwater depletion started to accelerate in the 1940s and 1950s, long before fracking became widespread in the 2000s.

The bigger problem is water-intensive agriculture. In 2005, around 80 billion gallons of groundwater were withdrawn every day across the U.S., of which 53.5 billion were used for irrigation — dwarfing the 14.6 billion gallons for domestic use and the three billion gallons taken by industry.

In Texas, irrigation accounted for over 71 per cent of all groundwater extraction, rising to 95 per cent in Nebraska.

The massive rise in water use for irrigation can be attributed mainly to the introduction of centre-pivot sprinkler systems in the 1950s. In North Dakota, the number of irrigation wells rose from fewer than six in 1960 to almost 1,500 by 1980, which were pumping up to 65 million gallons per day at the height of the irrigation season to water 100,000 acres of land.

“Continuation of depletion at observed rates makes the water supply unsustainable in the long term,” the latest survey states.

Depletion on this scale represents a severe threat to the environment as well as to supplies of water for drinking and irrigation on which communities depend. Once depleted, the lost storage cannot easily or quickly be recovered, USGS warns.

Brief

KIEV / REUTERS U.S. chemical giant DuPont launched a seeds plant in Ukraine June 11 designed to help farmers increase harvests with more productive seeds, the company said.

The plant, which cost more than $40 million, is located in the central region of Poltava, the key area for Ukrainian agriculture.

The facility will produce seeds of maize, sunflower and rape, it said in a statement.

Ukraine, the world’s fourth-largest maize exporter in 2011-12, plans to harvest a record 27 million to 28 million tonnes of the commodity this year, but still needs higher-quality seeds to increase yields.

Another global player on the seed market, Monsanto Co., said last month it planned to launch a non-GM (genetically modified) corn seed plant in Ukraine in 2015.

The post U.S. farmers are withdrawing unsustainable amounts from aquifers appeared first on Alberta Farmer Express.

Until recently, the academic and policy debate about futures price formation has been locked in an acrimonious and polarized standoff between market fundamentalists, who insist all price moves reflect supply-and-demand fundamentals, and those writers who blame speculators for every rise in food and fuel prices.

Anti-poverty campaigners focus on the role of speculation because they want governments to impose more controls on the cost of food and fuel. Free market economists stress the role of fundamentals to deny governments any ammunition to meddle.

Both positions are extreme and unconvincing.

Now Xiaoli Etienne, Scott Irwin and Philip Garcia have published an innovative paper examining the evidence for temporary price bubbles in markets where prices are otherwise driven by fundamental factors.

According to the authors, futures prices for grains, livestock and soft commodities like sugar have all exhibited multiple bubbles over the last four decades, with bubbles more common in the 1970s and again in the 2000s than during the 1980s and 1990s.

Bubbles pre-date the rising popularity of indexing strategies and the “financialization” of commodity markets. There is no evidence bubbles have become more frequent or larger following the entry of more financial investors into commodity futures markets since 2005.

“Bubbles existed long before commodity index traders arrived and the process of commodity market financialization started,” according to a paper on “Bubbles in Food Commodity Markets: Four Decades of Evidence” presented at an IMF seminar in Washington on March 21.

In fact most of the biggest and long-lasting bubbles occurred in 1971-76. Financialization may have ensured bubble-like price movements are now smaller and reverse more quickly.

“Compared to the post-2000 years, speculators and irration-al traders (may have) played a greater role influencing prices in the 1970s because markets were less actively traded. The arrival of new traders in recent years, coupled with a dramatic increase in trading volumes, has increased market liquidity, apparently reducing the frequency of bubbles,” the authors write.

The authors speculate bubbles may be driven by herding behaviour, momentum trading or other “noise traders.”

“One possible explanation may be that markets are sometimes driven by herd behaviour unrelated to economic realities… As markets overreact to new information, commodity prices may thus show excess volatility and become explosive.

“It may also be that there are many positive feedback traders in the market who buy more when the price shows an upward trend and sell in the opposite situation. When there are too many feedback traders for the markets to absorb, speculative bubbles can occur in which expectations of higher future prices support high current prices.

“It may be fads, herding behaviour, feedback trading, or other noise traders that have long plagued futures markets were highly influential in recent price behaviour. Recent empirical evidence does suggest that herding behaviour exists in futures markets among hedge funds and floor participants.”

The paper concludes with an appeal for more research to identify the source of bubble-like price behaviour.

The post Price bubbles and commodity markets appeared first on Alberta Farmer Express.

Until recently, the academic and policy debate about futures price formation has been locked in an acrimonious and polarized standoff between market fundamentalists, who insist all price moves reflect supply-and-demand fundamentals, and those writers who blame speculators for every rise in food and fuel prices.

Anti-poverty campaigners focus on the role of speculation because they want governments to impose more controls on the cost of food and fuel. Free market economists stress the role of fundamentals to deny governments any ammunition to meddle.

Both positions are extreme and unconvincing.

Now Xiaoli Etienne, Scott Irwin and Philip Garcia have published an innovative paper examining the evidence for temporary price bubbles in markets where prices are otherwise driven by fundamental factors.

According to the authors, futures prices for grains, livestock and soft commodities like sugar have all exhibited multiple bubbles over the last four decades, with bubbles more common in the 1970s and again in the 2000s than during the 1980s and 1990s.

Bubbles pre-date the rising popularity of indexing strategies and the “financialization” of commodity markets. There is no evidence bubbles have become more frequent or larger following the entry of more financial investors into commodity futures markets since 2005.

“Bubbles existed long before commodity index traders arrived and the process of commodity market financialization started,” according to a paper on “Bubbles in Food Commodity Markets: Four Decades of Evidence” presented at an IMF seminar in Washington on March 21.

In fact most of the biggest and long-lasting bubbles occurred in 1971-76. Financialization may have ensured bubble-like price movements are now smaller and reverse more quickly.

“Compared to the post-2000 years, speculators and irration-al traders (may have) played a greater role influencing prices in the 1970s because markets were less actively traded. The arrival of new traders in recent years, coupled with a dramatic increase in trading volumes, has increased market liquidity, apparently reducing the frequency of bubbles,” the authors write.

The authors speculate bubbles may be driven by herding behaviour, momentum trading or other “noise traders.”

“One possible explanation may be that markets are sometimes driven by herd behaviour unrelated to economic realities… As markets overreact to new information, commodity prices may thus show excess volatility and become explosive.

“It may also be that there are many positive feedback traders in the market who buy more when the price shows an upward trend and sell in the opposite situation. When there are too many feedback traders for the markets to absorb, speculative bubbles can occur in which expectations of higher future prices support high current prices.

“It may be fads, herding behaviour, feedback trading, or other noise traders that have long plagued futures markets were highly influential in recent price behaviour. Recent empirical evidence does suggest that herding behaviour exists in futures markets among hedge funds and floor participants.”

The paper concludes with an appeal for more research to identify the source of bubble-like price behaviour.

The post Price bubbles and commodity markets appeared first on Alberta Farmer Express.

In a 2010 working paper on “Commodity prices, commodity currencies, and global economic developments” and now featured on the New York Fed’s website, Jan Groen and Paolo Pesenti ask “how easy it to forecast commodity prices?”

The authors conclude “across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.” In other words, forecasts could not beat a prediction based on the current price or some weighted average of past prices.

Groen and Pesenti considered four families of indices and three ways of forecasting them.

The first approach focused on exchange rates from a small group of commodity-exporting countries which derive a substantial portion of output and export earnings from primary products but are too small to exert monopoly power on prices and have free-floating exchange rates (Canada, Australia, New Zealand, Chile and South Africa).

The second and third added a wide range of other theoretically important factors – including macroeconomic variables , commodity fundamentals, and the Baltic Dry Index (ocean freight).

Groen and Pesenti examined the out-of-sample forecasting power of these approaches over five time horizons ranging from one month and three months to two years and compared them with benchmark predictions based on a random walk or an autoregressive process.

For some approaches over some time periods the forecasts performed a little better than predictions based on the benchmarks, but the outperformance was fairly random. Some approaches worked for some indices at some horizons, but not for other indices at other time frames.

“Neither the exchange rate approach nor a broader approach that uses information from larger data sets including both exchange rates and other macrovariables are overwhelmingly successful in predicting commodity price dynamics,” observe the authors.

Perhaps poor performance of exchange-rate and macroeconomic based forecasts was due to the dominance of commodity specific factors in determining returns? The authors therefore consider whether including futures and forward prices for commodities, which encapsulate expectations about specific factors, could improve the predictions.

They warn “futures prices provide, at best, highly noisy signals about future price spot prices” and “ it is unclear whether prices in relatively illiquid segments of the futures market such as longer-dated contracts can be considered unbiased and effective aggregators of information.” In any event, adding futures and forward prices into the models did not improve their performance substantially.

We are left with the humbling conclusion that our ability to forecast commodity prices is no greater than our ability to forecast other aspects of the future. It will not surprise long-standing professionals in commodity markets; the authors have provided statistical proof of what most market participants and observers have long known.

JohnKempisaReutersmarketanalyst

The post In Other Words, Throwing A Dart Is Just As Good appeared first on Alberta Farmer Express.

Investment News,which describes itself as the leading news source for financial advisers, has renowned Yale Professor Robert Shiller advising investors to buy farmland.

“My only bullish call is farmland,” Shiller told the annual conference of the Investment Management Consultants Association in Las Vegas. The headline boldly declares, “Green acres best bet for making green, Yale’s Shiller says.”

By contrast,The Economistmagazine last month, in an article headlined, “Sowing bubbles: Regulators growing increasingly worried about steep cropland prices,” featured a comment from Shiller describing American farmland as “my favourite dark-horse bubble candidate for the next decade or so.”

The apparently contradictory messages are in fact perfectly consistent with one another and with Shiller’s behavioural approach to asset prices, set out most famously in his bookIrrational Exuberance.

As he explained there, most bubbles start with a strong plausible investment case grounded in fundamentals especially in the early stages, but internal dynamics can then carry the movement in prices too far as price rises stimulate more buying and a bandwagon effect.

Whether now is a good time to buy farmland depends on where in the bubble process the market has reached.

(Ir)rational bubbles and willing fools

It is perfectly possible to argue farmland is a good investment now, even though it might become a bubble later. It is also possible to believe a bubble is already forming but that it will be profitable to ride along with the herd for the next few months or even years.

Identifying compelling investment narratives in the early stages, getting in near the start, riding the wave and then pulling out before it finally collapses has been a highly profitable investment strategy. The secret is not to get carried away by the hype or the self-serving talk about fundamentals.

It is precisely the strategy that financier George Soros used to exploit the bubble in real estate investment trusts in the 1970s.

“I was present at the creation and, fresh from my experience with conglomerates, recognized their boom/bust potential,” he wrote in a famous research note.

“The shakeout is a long time away. Before it occurs, mortgage trusts will have grown manifold in size and mortgage trust shares will have shown tremendous gains. It is not a danger that should deter investors at the present time. The only real danger at present is that the self-reinforcing process may not get underway at all.”

It was why Soros could warn in 2010 that gold was “the ultimate bubble,” even while his hedge fund established a large long position in the SPDR Gold Trust and iShares Gold Trust before selling it out in Q1 2011.

Fundamentals alone are never enough to explain asset price movements. As theLexcolumn of the May 19Financial Timesnotes, the best explanation for recent commodity price movements blends classic supply-demand-inventory analysis with the impact of monetary policy and liquidity, and shifting psychology.

In the face of waves of irrational exuberance that first create and then destroy vast quantities of wealth, the right response for both regulators and the media is to maintain healthy skepticism about talk of paradigm shifts, new eras and new asset classes.

A fool and his money…

Warnings might not make a huge difference. As the adage goes, “A fool and his money are soon parted,” and there have been plenty of willing fools in recent years. But regulators should still try to understand the risks and highlight them and educate the public.

It is encouraging that the Kansas City Fed, led by veteran supervisor Thomas Hoenig, has taken the lead in warning about the dangers of rising farmland prices. The Federal Deposit Insurance Corporation, led by equally careful supervisor Sheila Bair, this year held an event titled, “Don’t Bet the Farm,” according to theEconomist.

Greed and fear are emotions hardwired into investor behaviour. But at least regulators can avoid pumping up bubbles even more by lending their imprimatur to them, as former Fed chairman Alan Greenspan appeared to do with Internet stocks and equities, and then the housing market and securitization.

Meanwhile investors and analysts should learn from the masters and incorporate psychology, bubbles and crashes into their approach to asset pricing alongside more conventional measures of fundamental value.

John Kemp is a Reuters market analyst.

———

“Myfavouritedark-horse bubblecandidateforthe nextdecadeorso.”

ROBERT SHILLER YALE UNIVERSITY

The post Don’t Get Carried Away By The Farmland Hype appeared first on Alberta Farmer Express.