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Will Crude’s Rise Boost Corn Prices?

DES MOINES, Iowa -- Look out! The crude oil market is set to scream higher this spring and summer. The question becomes will this help boost higher corn and soybean prices?

In general, if gasoline prices are up, biofuels prices rise, incentivizing ethanol and biodiesel plants to use more corn and soybeans to make their products.

While some analysts believe it’s yet to be seen whether higher crude causes an increase in ethanol blending, others still see a relationship between the two energy markets.

At the time of this writing, the WTI crude oil market trades in the mid-$60-per-barrel range. However, analysts expect to see $80-per-barrel crude oil this summer, just as Saudia Arabia oil experts suggested in mid-April.

If realized, it would be the highest crude oil price since 2015.

What’s driving the energy market higher? 

The short answer is that global crude oil demand is reaching an all-time high.

Production cuts from Saudi Arabia, OPEC, and non-OPEC countries like Russia, plus the U.S. summer driving uptick, cold U.S. and European winters, and an emerging market demand are major factors for the price surge.

China, India, and Vietnam are all emerging markets for the crude oil industry. And all of them are experiencing increases in gasoline usage.

“We were swimming in product a year ago,” says Daniel Flynn, a senior market analyst for The Price Futures Group. “And everybody thought the fracking of oil would keep up with the global demand. But the demand is so high and too many wells have been capped, which will cut the production output of those wells vs. what they once produced.”

Seasonals

In any given year, April and May are months that the crude oil market falls, due to higher supplies.

“This year that market seasonal is not working out,” Daniel Flynn says.

Crude, Corn Relationship

Phil Flynn, senior market analyst for The Price Futures Group, says that the relationship between ag commodities and crude oil is still there but not as strong as it once was.

“Crude is a good forward indicator of the global economy. If the crude prices are up, it’s because the general economy is doing well. That should bode well for ag commodities,” Phil Flynn says.

Phil Flynn adds, “I do think there was a time when the relationship between corn, soybeans, and the crude oil market was closer. A few years ago, when the government was conducting qualitative easing with interest rates, fed policy was driving the markets. That would give the economy a rally.”

Demand Data

Retail U.S. gasoline prices, in mid-April, reached $2.69 per gallon vs. $2.42 a year ago, according to the Energy Information Agency.

Though U.S. gasoline inventory stocks (238.9 million barrels) are higher than they were a year ago (236.1 mill. barrels), more product is being exported, throwing off the supply/demand picture.

For ethanol, an extended cold weather pattern in April caused a dip in the four-week average ethanol-based gasoline demand in mid-April to 9.25 million barrels vs. 9.311 million a year ago.

Diesel prices have jumped from $2.58 per gallon a year ago to $3.04 this year, according to the EIA data.

Some farmers are secretly enjoying the higher crude oil prices while others may be cursing higher biofuels, Flynn says.

“If the farmers didn’t get hedged, believing some of those analysts who were saying diesel prices were going to be cheap forever, that could be a problem for them,” Phil Flynn says.

The supplies of distillate gasoline are as tight as they’ve been in many years, Flynn says.

“This year, we have only 128 days of distillate gasoline vs. 158 days a year ago, in mid-April. This tight supply could mean more expenses for farmers fueling their tractors.”

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