With $40 Oil Coming, Should You Buy All Your 2015 Fuel Now?
A couple of weeks ago, $50/barrel was seen as a potential bottom for the crude oil market that was hovering closer to $70. That's changed quickly, and it's having some major implications for fuel-buyers.
"The global consumer is getting a huge boost here; this has to be good for the U.S. economy, which is more than 2/3 consumer-driven," says Sal Gilbertie, founder and President of Teucrium Trading LLC, sponsor of agricultural commodity funds traded on the New York Stock Exchange. "I'm certainly spending my energy savings pretty easily -- I went from $42/week to $27 a week to fill my tank and I'm spending my extra $15 a week discretionary income just like everyone else." Now, analysts are lowering the potential nadir price point for crude oil, and it's starting to fuel some speculation among farmers looking to maximize their fuel-buying dollars by forward-contracting their fuel needs as the market continues to drop like a rock. They, like the general consumer, will see savings from cheaper fuel. The question is: How much?
Crude oil futures have fallen below $57/barrel. That's off almost $8 in a week alone and down by about half from earlier this year. And, while this is bearish for just about every class of asset -- agricultural and otherwise -- farmers could see some payback from buying fuel at the right time. But, when will that be?
"In the past, I've made good money by locking in the next years fuel prices sometime in the December-to-February timeframe. This year, I''m not so sure about that. I'm beginning to think I will buy hand to mouth for a while until prices firm up," says Agriculture.com Farm Business Talk senior advisor Jim Meade / Iowa City. "Discussions on the future of crude prices are all over the place, but prices as low as $35 are mentioned. Even if the low price is $50, that would pressure fuel prices."
Current price levels definitely offer overall savings heading into a year when lower grain incomes are already straining farmers' budgets; but, there's likely more room for the market to slump before a turnaround, analysts say. When you pull the trigger on contracting fuel depends on how long you're willing to wait and risk losing out on lower prices.
"It really depends on your risk appetite. Yes, fuel prices cannot go down forever and it makes perfect sense to lock in some, if not all, of your fuel needs at current levels," says Peter Meyer, senior director for agricultural commodities at PIRA Energy Group. "If you’re a gambler, I would still lock in 30% to 50% at current levels and let the rest ride."
Meyer says the energy marketplace that not long ago was bracing for $65/barrel crude oil has now shifted its sights closer to $40/barrel, a price point that could be hit by year's end at the rate the market's fallen in the last few weeks. The investment community is likely banking on that $40 number after OPEC leaders said that's the likely low end for prices moving forward.
"[Investors] will definitely stick to the sidelines rather than try to pick a bottom. I believe there are some $65.00 longs out there now, and they have no interest in adding to that position," Meyer says. "That $40.00 number comes from an OPEC oil minister who said they had no reason to convene an emergency meeting or cut back production, even if oil gets to $40.00. Folks seized in that number and are talking about it today."
But, it's always good to think and act ahead and secure fuel supplies well ahead of that price level, he adds. That may mean "splitting the difference" between the projected high and low market prices and staying slightly ahead of overall supply needs.
"There’s an awful lot of talk about oil getting down to $40.00. A few weeks ago the talk was $65.00. I always like to split the difference, which would put us around $52.50," he says. "Why not buy some now around $58.00 and scale down to $50.00.
"All this said, we do not believe a substantial rally is coming within the next 6 months. Hand-to-mouth should work well but I see no risk in buying a 'little extra' just in case."