Todd's Take

Even after falling $1.97 a barrel to $91.71 on Sept. 28, November crude oil prices are at an expensive level, near their highest prices of the year and up 30% in the third quarter. An article in Thursday's Wall Street Journal by Anna Hirtenstein pointed out the political ramifications of oil's higher prices (https://www.wsj.com/…).

Saudi Arabia will take in roughly $2.6 billion of oil revenue this quarter, helping support a government the International Monetary Fund said needs $81 per barrel to balance its budget. Russia is on track to earn roughly $2.8 billion, further support for their war on Ukraine. The 4 million barrels per day (bpd) of production cuts from the OPEC+ group during the past year took a while to bear fruit, but the U.S. Energy Department estimates the world economy is strong enough to support a 1.8% increase in world petroleum demand in 2023. Private analysts expect a tighter supply scenario in the fourth quarter.

So far, U.S. oil producers have been reluctant to drill for more oil. U.S. Energy Department data shows domestic oil production increased from 12.1 million bpd at the end of 2022 to 12.9 million bpd as of Sept. 22, just short of the pre-COVID peak of 13.0 million bpd. Understandably, oil producers have been reluctant to make long-term commitments at a time when the White House is trying to push green alternatives. Benoit Morenne and Collin Eaton offered another important explanation in Thursday's Wall Street Journal from Texas oil executive Kirk Edwards who said, "In one month, they (OPEC+) can make a decision to put two million more barrels a day on the market, which will drive the price (of oil) from 90 to 60 dollars." (https://www.wsj.com/…)

Edwards is correct that the kingdom could release more oil if it wanted to. The Energy Department estimates OPEC has surplus capacity of 4.0 million bpd, well above the 10-year average of 2.7 million bpd. In early 2020, Saudi Arabia punished U.S. producers by initially increasing oil production when the world economy was panicked by COVID-19, a move that resulted in more than 100 North American oil and gas bankruptcies.

So here the U.S. sits in a tough predicament of not only paying higher gasoline and diesel prices, but of also watching two hostile governments profit from the situation, including the wrong side of the war on Ukraine.

I am old enough to recall the expensive spike in gasoline prices in the 1970s. I also remember being a young broker in the mid-1980s when ending corn stocks exceeded 4.8 billion bushels (bb), a time when annual corn demand was roughly half of today's amount. Turning excess grain into ethanol seemed like a great idea, but it took 20 years and $90 crude oil to make it happen politically. Even then, ethanol was only allowed a limited role and those limits remain in place today.

After years of disillusionment with politics, I don't consider myself obligated to either party, other than to say it would be nice to see the country figure out a way to stop rewarding other countries that make the world a more dangerous place. Here in the U.S., natural gas production is doing well, but clearly more oil production is needed, just as more energy from other sources like wind and solar is also needed. Add to the list a ban on cryptocurrencies and you may get my vote.

As I mentioned in last week's Todd's Take (see "Has the Case for Ethanol Come Full Circle?" at https://www.dtnpf.com/…), in all the discussion of green alternatives, it is disappointing ethanol has not received more appreciation for its low-carbon qualities and contributions to better air quality. The ethanol industry is already in place throughout the Midwestern U.S. and ready to be a part of the solution, if only policy makers would allow. It was encouraging earlier this week to hear Ron Snyder, senior adviser for agriculture at the Environment Protection Agency (EPA), say EPA is working to finalize a rule allowing permanent sales of E-15 in eight Midwestern states (https://www.dtnpf.com/…). That is a good start, but more could be done.

Meanwhile, Brazil continues to push forward corn and soybean production at an aggressive pace, unlike any other nation, and the future for U.S. exports looks rough. Does it seem crazy to anyone else that after a lifetime of hostility from Saudi Arabia and other oil producers, the U.S. holds back the most available help for both, energy prices and international threats? Maybe it's a good time to remind our urban acquaintances that every green plant a farmer grows takes carbon out of the air and provides us energy in a variety of forms. Don't believe it? Ask a farmer.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at Todd.Hultman@dtn.com

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