By Andrew Whitelaw | Source: AIP, NYMEX
The seemingly endless hours of sitting in a tractor sowing is about to commence. As the crop is planted a substantial volume of diesel will be consumed. In this update we look at recent cost increases, which have been substantial.
Diesel is a derivative of crude oil therefore when crude falls, in theory so should diesel (and vice versa).
This is shown in Figure 1, which tracks the weekly change (%) of both crude oil and diesel. This chart has a lag of one week, as there is more correlation when the diesel price is lagged by one week. This means that typically the movement in crude oil will be reflected around a week later in Aussie diesel pricing.
Crude oil prices hit a four-year peak in October (Figure 2) followed by a sharp decline. The market has recovered slowly since Christmas. The diesel price in Australia has understandably followed crude, with prices increasing markedly.
At current levels diesel is pricing at the same level as early November. This places diesel at the 70th percentile when using a time frame of 2004 to present. This means that 70% of the time prices have been lower than current levels.
The oil market is notoriously difficult to predict. However, oil production in March was at its lowest level since early 2015. This is due to the Organization of the Petroleum Exporting Countries (OPEC) members cutting their output to constrain supply thereby increasing prices.
If the OPEC nations continue to adhere to the cuts, then this will likely lead to higher oil prices in the coming months.
Diesel prices have increased 12% from their low during the end of 2018. This is due to the rise in crude oil levels.
As diesel makes up a substantial cost for cropping operations, this will have an impact on the overall cost of production.
No-one knows where diesel prices will move over the course of the year. However, it is possible to hedge against movements in the price through your bank.
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