Producer group OPEC+ said after meeting in early June it would bring forward oil production increases to offset lost Russian output as a result of western sanctions in the wake of Russia’s invasion of Ukraine. 

But while this action would seem an attempt to ensure supply meets demand, and therefore keeps prices from surging even higher, the OPEC+ decision was quickly followed by news that Saudi Arabia will boost its official selling prices for July for its customers in Asia and Europe. 

OPEC+ said after its June 2 meeting that the group would lift output by 648,000 barrels per day (bpd) in July — or 0.7 per cent of global demand — and a similar amount in August, up from an initial plan to add 432,000 bpd a month over three months until September. 

OPEC+ includes the Organization of the Petroleum Exporting Countries and other producers, including Russia, which has seen its output decline by about one million bpd since the Feb. 24 attack on Ukraine. 

The oil market was largely unimpressed by the OPEC+ promise of higher output, with benchmark Brent crude futures LCOc1 gaining 1.8 per cent on June 3 to close at US$119.72 a barrel. 

Brent is now about 24 per cent higher than it was the day before Russia’s invasion of Ukraine, and given the European Union’s decision to end about 90 per cent of its imports from Russia, the pressure remains for further gains. 

The problem for oil markets is that the credibility of OPEC+ is becoming severely strained, given the group’s inability to produce as much crude as it says it is going to. 

The OPEC part of the group produced 24.72 million bpd in May, meaning their output was about 858,000 bpd below the target agreed by the wider OPEC+ collective. 

Add in Russia’s declining output and exports, and it’s clear that actual supply is falling well short of what OPEC+ has pledged. 

This failure to meet targets is gaining increasing attention in a market fretting over whether Russia will be able to switch its customers and maintain export volumes, or whether the global market is going to tighten further as Russian volumes decline. 

The OPEC+ decision to say it would boost output may be viewed as an attempt to calm the market over supply worries, and thus try to ensure that prices don’t spike to levels that would lead to a global economic slowdown and its related demand destruction. 

It is perhaps curious that Saudi Aramco, the kingdom’s state-controlled oil producer, chose to increase its official selling prices (OSPs) for refiners in its top destinations of Asia and Europe for July-loading cargoes. 

Aramco raised the OSP of its benchmark Arab Light grade for Asia to a premium of US$6.50 a barrel over the Oman/Dubai regional benchmark, up $US2.10 from US$4.40 for June and above the increase of US$1- $1.50 expected by Asian refiners surveyed ahead of the announcement. 

The OSP for customers in northwest Europe for Arab Light was lifted to $4.30 a barrel over Brent for July, up $2.20 for June-loading cargoes. 

An increase in the OSPs for Asia was always on the cards given the recent surge in refining margins, and also the increase in the premium of Brent crude over the Dubai equivalent. 

A typical refinery in Singapore processing Dubai crude is enjoying a margin of about $25.19 a barrel, or more than three times the 365-day moving average of $8.11. 

This is a reflection of strong demand, especially for diesel, and the sharp decline in exports of refined fuels from China this year, as well as from Russia, which has tightened product markets. 

While it is logical for Aramco to raise prices to capture for itself some of the high refining margins, it is seemingly at odds with the OPEC+ idea of ensuring markets are well supplied at a price that doesn’t damage the demand outlook.

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One of those factors is the amount of crude oil produced by members of the Organization of Petroleum Exporting Countries (OPEC), along with some other oil-producing countries such as Russia, in an alliance known as OPEC-plus.

“It’s about OPEC-plus countries either being very disciplined in not producing as much crude as they can, or producing as much as they can, but falling short of what is needed and what is targeted,” he said.

The tension over a possible invasion of Ukraine by Russia is another factor driving up crude prices, as is the industry still trying to recover from the impact of the COVID-19 pandemic.

Kloza said he expects global crude oil prices to push to at least $100 per barrel, perhaps a little more (all figures US$). He noted some pump prices in California hit $4.72 per gallon on Wednesday, making for the most expensive fuel prices ever in the U.S.

“We are projecting that many states, not everyone, will see their highest [fuel] prices ever,” he stated, noting pump prices are likely increase by 50 cents per gallon over the coming months.

“It’s almost a fait accompli that we are going to get to at least $100 per barrel. The question is whether we stay there for long or do we go much higher?” Kloza posed.

However, he cautioned about the forecasts “from investment bankers and commodity houses” that would like to see crude oil increase to $125-$150/barrel. He suggested such projections could be too high.

One factor in the rise of North American prices Kloza pointed out is they are not demand-driven as demand across the continent remains below that of pre-pandemic levels.

For Canada, particularly the West, Kloza said that diesel prices are set to return to those last seen in 2008 and perhaps go higher.

“You can almost make the case that diesel prices will spike higher than gasoline prices,” he said.

Kloza said diesel is not as readily available for vehicle use as gasoline in Canada and the U.S. because of the demand from home heating and power generation.

To Kloza, the rise in fuel prices is leading to “an inflation-based recession” — a situation he said is being reported more and more in the media.

— Glen Hallick reports for MarketsFarm from Winnipeg.

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Corn ending stocks for the U.S. were pegged at 53.15 million tonnes, about five million tonnes higher than the previous month’s report. However, prices were steady on the day, finishing up by about a cent at US$3.31 per bushel.

Corn to be used for ethanol had been expected to be around 5.425 million bushels in March, but that was lowered to 5.05 million bushels.

That’s mainly because bearish influences on the market due to COVID-19 are “already in the market right now,” said Scott Capinegro of Barrington Commodities in Barrington, Ill.

“Corn is feeling stabilized this week.”

Prices aren’t expected to turn bullish anytime soon, though, as large ethanol stocks have been weighing on corn values.

“Corn isn’t going to go anywhere until we get planes in the air and people driving again,” Capinegro said.

The Organization of Petroleum Exporting Countries and Russia agreed to cut oil production by 10 million tonnes. Talks of the meeting rallied crude oil futures off of previous lows. According to one delegate, Saudi Arabia and Russia will each lower their daily output to approximately 8.5 million barrels per day. Market participants expect ethanol to benefit from the rally.

Brazilian local currency has gained strength relative to the U.S. dollar, which has also provided some support to U.S. exports.

“Our corn is pretty much the cheapest corn in the world,” he said, noting that recent export data has been supportive.

— Marlo Glass reports for MarketsFarm from Winnipeg.

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The price on carbon rose from $20 per tonne to $30 per tonne effective April 1.

The federal Liberal government is standing firm on its commitment to increase the cost by $10 per tonne each year until 2030.

Grain Growers of Canada says the move increases uncertainty for farmers as they head for the fields this spring.

“You know, for Canadians, this could mean higher food prices at the grocery store at a time when we can all afford it the least,” said executive director Erin Gowriluk, adding costs increases will depend on the commodity. “For some commodities, it may be at the end of the day consumers who pay more. But for our members, for the most part, these costs can’t be passed down.”

Some believed Ottawa would halt the scheduled tax increase due to the COVID-19 pandemic. Those expectations were arguably higher for the agriculture industry, as there were rumours stretching back to the end of 2019 that the Liberals were willing to make changes to offset the program’s impact on the sector.

Prime Minister Justin Trudeau ruled that out, repeating just days before the scheduled increase that the carbon pricing program includes rebates to those who pay into it.

“The price on pollution has been designed to put more money in household pockets, more money in the pockets of the middle class while we do the things that are necessary to fight pollution and protect our planet,” he said, telling reporters the need for the policy “remains even at a time of immediate crisis and pandemic.”

Gowriluk said her organization’s focus has been on mitigating the impact of COVID-19.

“There are issues right now that are more important and more pressing for our members than the carbon tax at this moment in time,” she said. “We felt we had gained some good momentum on this file.”

The GGC and other farm groups were supporting two pieces of proposed legislation — one in the Senate and one in the House of Commons — aimed at reducing the impact of carbon pricing on agriculture, prior to the suspension of Parliament as a result of COVID-19.

“We’re really pushing for ways to make sure that agriculture could remain competitive not only on the domestic market, but certainly on the on the global market,” said John Barlow, the Conservative critic in the Commons for agriculture and a proponent for one of the bills. “We want to see that expansion of the exemption to include natural gas and propane.”

Barlow said the federal government should at least take into account extra costs from carbon pricing in the context of the so-called “harvest from hell” and COVID-19, saying the pandemic offers a “perfect opportunity” for the Liberals to address the importance of success within agriculture.

“When you see all of these variables and these X-factors being piled on agriculture, you know, I don’t understand the logic,” he said, adding that raising taxes during a financial crisis is unwise.

“To me, it shows how out of touch and tone deaf they are.”

A recent report from the Parliamentary Budget Office (PBO), assuming social distancing and isolation measures remain in place for August, predicted real GDP to decline by 2.5 per cent in the first quarter of 2020, and 25 per cent in the second quarter.

The report also assumed members of the Organization of the Petroleum Exporting Countries (OPEC) and its partners won’t limit oil production and target nations — such as Canada — with balanced oil markets.

— D.C. Fraser reports for Glacier FarmMedia from Ottawa.

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Patrick DeHaan, head of petroleum analysis for GasBuddy, said retail diesel prices are down by about 10 to 15 cents per litre since the beginning of the year.

The drop in prices is caused by lower-than-average demand, partially due to milder winter temperatures in regions where diesel is used to heat homes.

However, as with most financial indices, crude oil and diesel prices are largely at the mercy of the rapidly spreading COVID-19 coronavirus. DeHaan expected prices to continue to trend downward in light of reduced demand for diesel, gasoline and jet fuel.

“The overwhelming odds are that diesel prices will continue to move lower in the weeks ahead,” he said.

The Organization of Petroleum Exporting Countries (OPEC) on Thursday proposed production cuts in order to stymie rapidly dropping crude values, which would “trickle down” to raise diesel prices as well. OPEC’s allies rejected the proposal.

However, refineries around the world could choose to cut output rates independent of an industry-wide agreement.

Oil refineries typically perform routine maintenance work on facilities at this time of year, which cause fuel inventories to dip slightly, DeHaan noted. That could cause “a small rally” in diesel prices, but markets are largely in lockstep with COVID-19 headlines.

“Prices are going to be driven by developments, either positive or negative, when it comes to the coronavirus,” he said.

“If the coronavirus simply stopped spreading tomorrow, things would be very different.”

— Marlo Glass reports for MarketsFarm from Winnipeg.

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GasBuddy.com senior petroleum analyst Dan McTeague pointed to an increase in overall demand, combined with a slowdown in heavy oil production and the federal carbon tax as well as pending IMO 2020 regulations — that is, the International Marine Organization’s planned reductions in sulfur content for all marine fuels, from 3.5 per cent to 0.5 per cent, by Jan. 1, 2020.

“It’s the perfect trifecta of bad news,” McTeague said. “While (people) may be upset with the gas price increase… they will be even more upset with the increase on diesel, which affects the price of everything.”

The analyst suggested people also keep a watchful eye on the value of the Canadian dollar relative to the U.S. dollar. There has been some speculation that the loonie, currently valued just above 75 U.S. cents, could plummet to 62 during the course of 2019, he said.

“If that’s the case, look for another 13-cent increase,” McTeague said of diesel prices.

Phil Flynn of the Price Futures Group in Chicago said the lack of heavy oil has been taking its toll. Diesel prices in the U.S. are at their highest average so far in 2019, at US$3.08 per gallon, according to the U.S. Energy Information Administration. Flynn suggested an increase to US$3.20 per gallon is possible.

“With farmers about to start planting, that will increase demand,” he said.

A big part of the problem has been oil production cuts by the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, Flynn said.

Added to that has been the U.S. embargo on imports of Venezuela’s heavy crude, which used to fed refineries on the Gulf Coast, on top of the inability to ship a sufficient amount of heavy crude from Canada, as the Keystone XL pipeline remains incomplete.

“If that were built, we would be getting a lot more of that heavy Canadian crude,” he said.

— Glen Hallick writes for MarketsFarm, a Glacier FarmMedia division specializing in grain and commodity market analysis and reporting.

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Under the plan, which is expected to be discussed by the cabinet this week before being submitted to parliament, any foreign investor would need to work in partnership with the state or a private Algerian firm, the document seen by Reuters said.

Algeria, a member of Organization of the Petroleum Exporting Countries (OPEC), has been encouraging farmers with incentives such as low-interest loans in a bid cut the state’s $50 billion annual bill for food and other imports (all figures US$).

The government relies on oil exports for about 60 per cent of its revenues, which are only now starting to recover after a crash in crude prices from above $100 a barrel in 2014 to below $30 in 2016.

“Agricultural concessions will also be open to foreigners,” the government said in the document on the initiative.

The document did not give details about what areas of farmland would be offered or say how concessions would be granted. An official said details would be outlined in separate legislation.

Foreign investors have long complained about bureaucratic red tape and other hurdles to investment in Algeria, a nation of 41 million people.

In 2010, Algeria approved a law allowing private firms to lease state-owned farmland for 40 years. The private firms were allowed to enter partnerships with foreigners, but the foreign investors were not allowed to directly hold a concession.

That initiative failed to provide a major agricultural boost. Prime Minister Ahmed Ouyahia said this year that three million hectares from that scheme were still undeveloped and he promised more steps to improve the situation.

Algeria, one of the world’s largest grain importers, bought 8.4 million tonnes of cereals in 2017 at a cost of $1.7 billion.

Its imports of cereals and other crops in 2016 from Canada alone were valued at about $321 million, making up about 82 per cent of Canada’s total exports to Algeria that year, according to World Bank data.

Algeria’s government aims to boost wheat output to 5.3 million tonnes by 2022 from 3.5 million tonnes in 2017. It also wants to double production of potatoes, milk, meat and other products in the next four years.

As part of its effort to boost agriculture, the government plans to expand areas under irrigation to two million hectares in 2019 from 1.3 million hectares now with new dams, helping offset the reliance of farms on unpredictable rainfall.

— Reporting for Reuters by Hamid Ould Ahmed. Includes files from AGCanada.com Network staff.

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In particular, Hurricane Harvey was a disruptive force on the U.S. energy market as it temporarily halted production at refineries.

Both gas and diesel prices rose in the days that followed and according to one industry-watcher, another increase could be coming.

“(Diesel) supplies are below the five-year average for the first time in many years,” said Phil Flynn of the Price Futures Group in Chicago. “It’s not just a U.S. issue, supplies are tight globally.”

Europe is importing near-record volumes of distillate oil from the U.S., which is putting more pressure on diesel, he said. Distillate fuel is used for heating as well as high-powered freight engines and industrial machinery.

“We’ve seen both gas and diesel prices go up,” noted Flynn. “All of a sudden we’re getting to the holidays and supplies are tight.”

Flynn feels some farmers have been underhedged because they were expecting low prices to continue.

“We feel that if we get a cold winter these prices could go up even more, so if you’re not hedged we would seriously think about locking in some of these prices,” said Flynn, adding low corn prices are not helping.

However, he said, the situation could change if there is a significant slowdown in the global economy. He points to weakening Chinese stocks as one example. The CSI 300 Index, which is comprised of 300 of the country’s largest companies, has slumped 4.1 per cent since Wednesday.

In addition, he said, an upcoming OPEC meeting could result in an agreement that disappoints the market and sends oil prices back down.

Members of the Organization of the Petroleum Exporting Countries are due to meet this week and discuss whether to extend cuts to global oil production. Already, there are worries that some countries will refuse to extend the agreement that curbed oil production.

“The reality of the situation is that we’re below average for this time of year regardless,” he said. “Demand is stronger than it has been for many years and the chance that this market will tighten all winter is a real possibility.”

— Dave Sims writes for Commodity News Service Canada, a Glacier FarmMedia company specializing in grain and commodity market reporting.

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“I would probably say in Canada you’re going to see numbers trickle lower here in the next month,” said Tom Kloza of the Oil Price Information Service in New Jersey.

Diesel prices across the Prairies were roughly in the $1 per litre range as of Tuesday.

North America is “sort of scraping bottom” when it comes to prices for oil, gas and diesel, Kloza said, due partly to the mild winter that most of North America experienced.

However, he said, the long-term bias is pointed higher and a few months from now the current values in Western Canada may look cheap.

It’s quite likely farmers will pay more for diesel during harvesting than seeding, he added.

While the Organization of the Petroleum Exporting Countries (OPEC) decided in 2016 to slash oil production, he said, it will be a while until those moves are felt.

“The problem with the OPEC cuts is they only run through the first six months of the year, and there are a lot of things in the second six months of the year that might send prices lower,” he said.

Another factor lurking in the market, this time with the potential to move prices higher, is Trump’s pledge to spend US$1 trillion on U.S. infrastructure.

“Money for infrastructure usually enhances demand for diesel,” he said.

Also, “there is a small chance though that Mr. Trump and the Republican Congress might try to put through an import duty on everything, including oil prices.”

That would have a drastic effect on the market, he said. “That would raise the price of gasoline, diesel and jet fuel by 35 or 40 cents immediately.”

— Dave Sims writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting.

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“We’ve been blessed with low diesel prices the past few years but we’re probably looking at higher prices in the New Year,” said Phil Flynn of Price Futures Group in Chicago.

The trend may have already started.

According to the Energy Information Administration (EIA) diesel hit US$2.53 per gallon this week, which was the highest point of 2016 and the fourth consecutive weekly increase.

“I mean we’re expecting a peak so we could be closer to US$2.75 a gallon next year,” he said.

The agreement reached by The Organization of the Petroleum Exporting Countries (OPEC) to limit oil production is another reason behind the rise.

The deal was completed in late November and since that time crude oil has risen from a mark of US$45.23 (Nov 29) to US$52.83 (Dec 23).

While the rise in diesel prices will heighten farmers input costs, Flynn says the jump in crude oil should provide a beneficial effect on commodities in general.

“I think that’s going to help commodities across the spectrum,” he said. “Hopefully we’ll see better markets.”

Prices for diesel have remained fairly steady across the Prairies recently, with Calgary and Edmonton reporting prices averaging around 77 to 98 cents per litre while Winnipeg was slightly lower at 95 cents.

The Canadian market will likely feel the same pressures as their neighbours to the south but there are a few factors that could mitigate that.

One is the direction of the Canadian dollar and how it stacks up against its U.S. counterpart.

Another is the current expansion of oil refineries across Western Canada and the correlating increase in supplies.

For example, Arizona-based Quantum Energy Inc. plans to open a 40,000 barrel-per-day refinery in Southeast Saskatchewan while Shell recently upgraded production at a facility in Edmonton.

“With the advent of new supplies coming on line. That will likely keep a damper on prices,” said Dan McTeague of Gasbuddy.com.

He says any drops in demand from the energy, mining or agriculture sectors could affect prices in Western Canada, but he doesn’t see any major downgrades happening soon.

“There’s nothing here suggesting a decline,” he said. “But what’s clear is that there appears to be an emerging pattern of greater production of diesel distillates throughout the Midwest and Canada.”

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