Analyzing the upside and downside of a market is one of the things I do every day, and you do, too.
In the end, I am hired to sell propane but I have always believed that the best way I can do that for the long haul is to be a trusted voice and analyst for my clients, not always someone barking the bulls and pushing folks to buy today; that’s not in your best interest. In the end, I trust that people will come to place value in the things we have to say and our ability to deliver product reliably and honor our commitments.
Which is why I am not afraid to pass along bearish news and underscore the downside risk that exists in the markets.
The upside is obvious this year with a big grain dryer year seemingly likely throughout the nation’s breadbasket and it may have a jealous sister effect, dragging along other markets. The corn harvest is projected to be a record, as this graphic shows:
The corn crop (as well as the lingering weather pattern and forecasts for a cool Sept-Oct-Nov) give me confidence that the fourth quarter of 2014 will support the contracts that people have purchased.
The first quarter of 2015 is still dicey, in my opinion. The unknown arrival time of El Nino is an enormous wildcard here and I just can’t provide any clarity on when that will be as the meteorological community doesn’t have consensus.
But to me, the biggest bear out there right now is crdue oil, and the glut of supply that is reported to exist. This article talks about that, and here are a few snippets:
“Despite armed conflict in Libya, Iraq and Ukraine, the oil market today looks better supplied than expected, with an oil glut even reported in the Atlantic basin,” the IEA said in its August monthly oil-market report released Tuesday. The IEA also cut its global demand-growth forecast for 2014 to 1 million barrels a day, down 180,000 barrels per day, citing weaker-than-expected demand in the second quarter.
In 2015, global demand is expected to rise by 1.3 million barrels a day on improving economic conditions worldwide. But that’s 90,000 barrels a day lower than the IEA’s prior forecast, because of weaker Chinese and Russian growth and higher expectations for non-oil power sector use in Japan. The forecast for next year would be the highest annual average level of oil production since 1972, the EIA added.
The thing that resonates most with me, aside from the obvious supply, is that despite severe geopolitical tensions in the Ukraine and Iraq and how much of a mess Iraq might become, the market isn’t heating up because of it.
Were I in your shoes, and I always try to look at things that way, I’d still be keen to cover myself for 4Q, likely above normal than average levels (for those of you in Iowa, Illinois, Indiana, Ohio and Michigan) but don’t get too carried away just yet for 1Q15. If El Nino arrives late 2014 and moderates the weather patterns, with a glut of crude on the market, the market could see some downside. Still, I feel owning gas at current levels is not a risky proposition. We’re not talking a spring/summer of 2008 scenario where crude was high as a kite and propane prices along with it, then the stock market crashed and crude oil values were cut in half and folks were left with propane contracts $.50 cents or more out of the market.
One thing to note, however: propane is currently just 44% that of the value of crude, on the low side of historic averages.