Is the oil supply problem over?

The price of crude oil fell $13, from $64 to $51 in less than 3 weeks. So why has the price of corn risen 15% since January 9, 2007, after nearly DOUBLING in price during 2006. If crude oil inventories are “high” (not my description) and supplies are plentiful, who in their right mind would bother with ethanol?

Good question, if I say so myself. The answer might be very complicated, or very simple – depending on your attention span.

The supply of crude oil to the U.S. economy has fallen smartly in the past 8 weeks. An industry outsider might assume that, considering the lack of winter weather in the U.S. until recently, the buyers of crude just didn’t need the stuff. Middle East crude oil off loaded in New York harbor on December 15, 2006 left the gulf about a month before, and was contracted for long before that. Therefore, the decline in imports was not related to the weather.

U.S. crude inventories are at their lowest level since October 2005, and gasoline inventories are only 1.5% higher then this time last year at this time. Considering the economy grew by better than 3% last year, we actually have less days of gasoline supply in inventory than during the year ago period. True, distillate inventories are roughly 3.5% higher than the year ago period, but the total of crude, gasoline and diesel is roughly equal to last year’s inventories. So what gives?

Well, if it ain’t supply, its gotta be demand. Part of it is weather related. Trucking tonnage was off in the 4th quarter. And world-wide inventories of corn, wheat, and rice, but especially corn, are at their lowest levels of days of supply in 3 decades. Does anybody besides me see the disconnect here?

Consider this:

Jan. 17 (Bloomberg) -- Corn futures rose in Chicago for a fifth straight session, extending a rally to 10-year highs, on signs that a near-doubling of prices in the past year has yet to slow demand for grain-based fuel and livestock feed.
The amount of corn inspected for export in the week ended Jan. 11 rose 24 percent to 33.4 million bushels, and the total since Sept. 1 is up 18 percent, the U.S. Department of Agriculture said yesterday. The department forecasts global supplies on Oct. 1 will be the lowest since 1978.

``Corn prices are not high enough to slow down demand,'' said Ron Uhe, commodity risk consultant for Mid-Co Commodities Inc. in Bloomington, Illinois. ``Ethanol is profitable, we haven't started to liquidate livestock herds, and there hasn't been a pullback in exports.''

Corn futures for March delivery rose 5 cents, or 1.2 percent, to $4.08 a bushel on the Chicago Board of Trade after earlier reaching $4.205, a record for the March futures and the highest for the most-active contract since July 1996. Prices have risen 15 percent since Jan. 9, the biggest five-day gain since Oct. 17.

The U.S., the world's biggest producer and exporter of corn, harvested its third-largest crop ever last year and that still won't be enough to prevent global supplies from dropping to the lowest in almost three decades, the USDA said Jan. 12.
U.S. corn production was 10.535 billion bushels last year, down from 11.112 billion in 2005, after farmers planted 4.2 percent fewer acres and a drought damaged fields, the USDA said. The crop was 2 percent smaller than the USDA forecast in November and below the 10.704 billion expected by analysts, based on the average of 15 surveyed by Bloomberg.

Falling Supplies

U.S. inventories of corn on Aug. 31, before the next harvest, probably will fall to an 11-year low of 752 million bushels, down 62 percent from a year earlier, the USDA said. Global reserves on Oct. 31 are forecast to drop 31 percent from a year earlier to 86.4 million metric tons, down 55 percent since 2000, the department said.

Reserve supplies of U.S. corn will amount to 6.4 percent of anticipated demand, the lowest by that measure since 1996. Inventories totaling 752 million bushels represent 23 days of consumption, down from 64 days a year earlier and the smallest since 1996 when most-active futures rose to a record $5.135.”

Crude oil inventories are at ther lowest in over 1 year, and grain inventories are at their lowest in 3 decades. Oil is the largest agricultural input. Ethanol is made from Corn in the U.S. Gasoline at the pump is 6% ethanol by volume...

Greg Jeffers

Mentatt (at) yahoo (dot) com