With temperatures hovering around 30 degrees and snow flurries flying here in the Midwest, it is difficult for producers to start thinking about spring planting. However, it's critical for them to start planning for spring now, especially when it comes to locking in fuel needs. Typically, the market offers good pre-buying opportunities from the Thanksgiving holiday to Valentine's Day. Last year the heating oil low was established the week of January 10, 2016 and the gasoline low the week of February 8, 2016. That being said, we are still seeing attractive prices in comparisons to previous years. Looking at a chart of monthly heating oil futures, you have to go back almost seven years to see prices we are currently experiencing. We all tend to get caught up in the day-to-day trade activity, which has been strong lately in the energy markets. However, if we step back and look at the larger picture it would tend to suggest that contracting or pre-buying is not a bad idea this year.
Winter months offer the best pricing opportunities for several reasons. First, futures prices for both gasoline and heating oil are softer because demand for the products is not as aggressive during the winter, especially for gasoline as consumer driving slows down. Secondly, this is the time of year when basis levels are soft. After the winter months, basis gains momentum and peaks out during fall when demand is the highest from the agriculture sector. With pre-buying you are locking in a flat price, so you do not have to worry about basis movements. We are not a proponent of contracting 100 percent of your usage needs, but having a portion of your needs covered is always encouraged. We advise working closely with your local FS Company to determine where your comfort level lies.
The coming months in the energy markets could prove to be interesting. The U.S. will be keeping an extremely close eye on the current OPEC agreement, which was established in November 2016 and went into effect at the beginning of January. They agreed to cut their production by 1.2 million barrels per day, which capped their production at 32.5 million barrels per day. There was a lot of speculation when the agreement was initially formed whether OPEC would actually follow through. However, early reports suggest they are doing a much better job at holding production cuts than most anticipated. Compliance alone would suggest a bullish tone in the market, but the industry balancing increasing U.S. rig counts along with large inventories of heating oil, gasoline and crude oil. Other unknown factors are what the Federal Reserve is going to do with interest rates and the direction of the dollar. With so many variables that we cannot predict, change or out guess, contracting fuel needs offers an alternative for producers to have a solid budgeted number that does not need to be second guessed.
Bridget Chinowth serves as a GROWMARK energy analyst. She can be reached at firstname.lastname@example.org.