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Page added on August 16, 2014
Crude Oil Prices Fall, But Relief For Consumers Limited
Grain and crude oil supplies are growing and weighing on futures prices, but the impact on consumers may be limited as other factors remain in the marketplace.
Grain prices fell sharply in the past few months in anticipation of a huge U.S. harvest this fall, and news from the U.S. Department of Agriculture did not disappoint. On Tuesday, USDA said their first estimate of this year’s corn harvest was 14 billion bushels, a record if realized. And the soybean harvest is forecast to be 3.82 billion bushels, also a record if realized.
Meanwhile, the U.S. Energy Department said in July the U.S. produced the most crude oil in nearly 30 years. Additionally, the International Energy Agency cut its global demand-growth forecast for 2014 to 1 million barrels a day and noted that supplies were plentiful despite ongoing geopolitical conflicts.
While headline the consumer price index may fall, the core index doesn’t count food and energy. Additionally, the impact at the grocery store may not be as noticeable, market watchers said.
“Corn prices may have come down 50% (from their highs), that doesn’t mean a box of corn flakes will fall 50% in price. Much of the price of food comes from the processing and movement of food, especially grain-based food,” said Sterling Smith, futures specialist at Citibank Institutional Client Group.
He said grain-based foods are not as price sensitive. For instance the cost of the wheat in a loaf of bread is about seven cents, whether it’s for the cheapest or most expensive loaf. It’s the manufacturing and processing of the wheat that makes for a more expensive, better quality bread.
While a giant grain harvest will help to alleviate some concerns about crop shortfalls the markets have witnessed lately, the big harvests come too late for livestock producers who had to cull herds over the past few years because of high feedstuff costs. That’s pushed meat prices to multi-year price levels. Given the time it takes to raise an animal to slaughter weight, especially for cattle, it may be some time before those prices start to fall.
Consumers are more likely to feel the commodity cost in foods like meat, where the product cost makes up more of the bottom line, Smith said. Other more price-sensitive commodities are coffee and cocoa, and because of supply problems, these foods are seeing elevated prices, too.
Gas, Oil Prices Down
Motorists are seeing some relief at the gas pump, said Phil Flynn, futures account executive for the Price Futures Group.
“It’s good news to see gasoline prices fall. It’s an indication that we’re at an end of an era of high gas prices and that might change the way we thinking about oil…. It’s a benefit of the U.S. production,” he said.
Despite the geopolitical events in the Middle East and between Russia and Ukraine, oil prices are at their lowest prices since April and are under the major long-term moving averages. At 1 p.m., September Nymex crude oil prices are at $96.05 a barrel.
“If this was five, 10 years ago, oil prices would be at $140 a barrel or higher on the geopolitical news,” Flynn said.
The reduced demand forecast from the IEA also underscores a weaker global economy from Europe and Asia, Flynn said, which he added suggests that the crude oil “sell off is not all good news.”
Smith said while grain prices are low, there might be some limits to how much further prices will fall. He noted there are some logistical problems facing the grain industry in moving such a record crop as many rail cars are being used to transport crude oil because of the record U.S. oil production. These bottlenecks have been an issue for some time, so some farmers might opt to build on-farm storage and wait to market grain.
14 Comments on "Crude Oil Prices Fall, But Relief For Consumers Limited"
Makati1 on Sat, 16th Aug 2014 7:20 am
This is an election year…
Davy on Sat, 16th Aug 2014 7:54 am
I was once a row crop farmer. I had 1000 acres of corn and beans. I know this market and I know the process of getting product out of the ground then to market. We are having good rains where it matters and this year looks to be a good corn/beans AG year. Yet, these Forbes psychos fail to mention the other half of the equation and that is the California AG crisis and the meat crisis. Forbs psychos fail to mention extreme food inflation mainly occurring in the after harvest areas of processing and distribution. We are also entering a time of climate instability. We are entering a time of daily more mouths to feed in a world of diminishing returns to the AG effort. Instead of acknowledging a short term plus with long term dangers the Forbes psycho’s pitch their cornucopian all is well message. We are very close to food insecurity for a variety of reasons. One reason not realized by many is the economic crisis that lurks under the surface or the polarizing multipolar world of trade wars and cold wars. Our complex interconnected global system is hyper efficient in distribution and trade/exchange with AG products. This whole system is dangerously in disequilibrium for a variety of reasons from diminishing returns to global QE to trade wars. If we have a significant crisis the AG industry will suffer and any reduction in production is dangerous at this point. We have multiple converging and inclusive issues facing AG “OR” let us call it a Mega AG predicament of falling production growth with population continuing to grow. This will not end well. I have said this repeatedly it all comes down to food security in the end. Global stability cannot hold with food insecurity, hunger or regional famines. The system will bifurcate with food insecurity with failed states. Food is the weak link.
Arthur on Sat, 16th Aug 2014 8:09 am
Demand destruction is outpacing supply contraction (if any), hence lower prices.
Pops on Sat, 16th Aug 2014 9:11 am
Davy, I think the biggest ag worry is that we’ve become regionally specialized via globalization.
The cost of transport is outweighed by the efficiency of producing crops in a perfect climate with a specialized infrastructure for that one crop.
Obviously that system is dependent on transport fuel but also on the comparative advantage of ideal regional climates. Climate changes slowly (in human terms) but weather changes overnight. Increasing variability in weather combined with increasing regional specialization means weather anomalies that might have once had a local impact in a diverse agriculture now have a global impact.
So, as a simple example (the one I always use) almond orchards pulled out in the central valley of California due to a drought have a global impact because that region grows 80% of the world’s almonds.
Ditto the midwest drought on the global corn harvest a couple of years ago, the SW drought on cattle pasture, etc.
Davy on Sat, 16th Aug 2014 9:54 am
Great point Pops, one that I will ad to my list of predicaments I carry around in my head.
Plantagenet on Sat, 16th Aug 2014 10:49 am
The US dollar is losing value due to FED money printing and Obama’s huge budget deficits. As the US dollar loses value, the price of everything in dollars is going up.
shortonoil on Sat, 16th Aug 2014 11:12 am
“It’s good news to see gasoline prices fall. It’s an indication that we’re at an end of an era of high gas prices and that might change the way we thinking about oil…. It’s a benefit of the U.S. production,” he said.
It is amazing that the MSM uses energy analysts that apparently don’t even understand “why” we use petroleum. Is an analyst and “energy analyst” if they don’t comprehend that oil is used because of its ability to deliver “energy”? It would then be too much to expect them to understand that the increase in US production has had absolutely nothing to do with increasing energy production. It has been to fulfill a potential market for diluent for Canadian tar sands production; which hasn’t had much to do with energy production either!
Apparently these so called “energy analysts” sit around all day, and do variations on: “how much wood can a woodchuck chuck”. The incompetence of the MSM is continually shocking. Unfortunately, it probably matches the competency level of the general public!
http://www.thehillsgroup.org/
synapsid on Sat, 16th Aug 2014 3:24 pm
…WOULD a woodchuck chuck…
Fixed. These things are important.
redpill on Sat, 16th Aug 2014 7:42 pm
Plant, the price of everything, except maybe other countries currencies. Over the last year, the dollar is up against the yen, the yuan, the Canadian dollar, the Mexican Peso, the Euro…..
Makati1 on Sat, 16th Aug 2014 8:36 pm
As an example. Not too long ago, food was 40% of an American/s expenses. Today it is around 15%. We are headed back to those higher prices and it is obvious what that will do to BAU.
My food expenses, excluding an occasional restaurant meal, is about 10% of my small income, but it too is going up. I still buy too many imports from all over the world, and could cut my food bill in half if I went totally Philippine sources, which I am doing slowly. The days of orange juice from South Africa, coffee from Columbia, cheeses from Europe, milk from New Zealand and beef from Brazil are going to end.
Harquebus on Sat, 16th Aug 2014 10:18 pm
The oil majors must be starting to tremble.
Charles on Sat, 16th Aug 2014 11:59 pm
10 years from now oil will be half the cost of what it is now. 15 years from now the price of oil will be one third of what it is now.
Why?
Mostly because of demand destruction.
Sales of natural gas trucks and buses are increasing by about 30% annually. The number of electric cars sold has tripled in the last two years. Both these trends will continue. Also diesal trains and buildings in the northeast are in the early stages of being converted over to natural gas. But they won’t take a real bite out of demand for another 4-5 years. But when they do…look out below.
Davy on Sun, 17th Aug 2014 7:24 am
Charles, have you ever considered an unrecognizable economic system with a pseudo price. This pseudo price may be from a centralize command control economic arrangement. IOW price controls and rationing. This type price would be irrelevant in relation to historic prices or forecasted future prices based on the current economic meme. We know a correction, contraction, and or a collapse is in the cards. A correction and or contraction will most likely leave us with some kind of BAU arrangement with your mentioned price reductions relative to demand destruction. I see a command control martial law arrangement at least initially in a collapse scenario. Industry and vital personnel to the economy will be made essential. I would see the energy and agricultural industries as made vital to martial law economic security. In this case of price controls, rationing, and military run production a normal price discovery is impossible. This command control economic arrangement is not worst case scenario but it is extreme. The worst case is a Kunstler “World made by a Hand”. I would call the command control arrangement the Kunstler “Long Emergency”. I imagine a correction and or contraction is the stepping down the descent stairway to the “long Emergency” then “World made by Hand”. I see a correction in the next few years based upon the current polarizing multipolar world of a fracturing global BAU. BAU is fracturing from trade wars, diminishing returns to central bank stability efforts, and a polarizing trade/exchange environment. In a hyper complex interconnected economic system declining growth or contraction will make this system dysfunctional in a short time. Fracturing trade arrangements and trade wars likewise destroy the efficiency which lowers growth causing dysfunction. The current manifestation of capitalism and representative democracy is in name only. The reality of these economic political structures is corruption, manipulation, disregard for laws, and wealth transfer policies. This is the other leg of the dysfunction to BAU globalism. If there is a disregard to the rule of law, disregard to normal price discovery, and wealth transfer instead of growth how can BAU globalism function normally? If you have a renewal of militarism and regional failed states this further stresses BAU globalism. The most important variable to BAU globalism is increasing growth and complexity in an environment of stability and confidence. Growth, complexity, and confidence are really one phenomenon. Everything mentioned above stresses growth, complexity, and confidence. There is a point of bifurcation from a maximum point of disequilibrium all system have. The landing and reboot cannot be forecast. We can describe some of the qualities of the landing and reboot but the when, how, and where are beyond forecast. So your price forecasting may have to include a pseudo controlled price of a long emergency of martial law or no price of a “World made by Hand”.
rockman on Sun, 17th Aug 2014 8:26 am
H – “The oil majors must be starting to tremble.”. They were already beginning to tremble in 1975 when I went to work for Mobil Oil.