There have been some excitingly bearish headlines in the energy sector lately. "Oil Prices Sink to Lowest Since 2009;" "Record Crude Oil Inventory Drags Crude Prices;" "Brent Below $40 as Resource Rout Deepens;" "EIA Cuts 2015, 2016 Crude Oil Price Views."
These are especially compelling to us grain market analysts who would otherwise spend the week flailing about for something interesting to say about corn, soybeans, or wheat fundamentals. Even with monthly World Agricultural Supply and Demand Estimates scheduled to be released by USDA on Wednesday, those markets' figures aren't likely to get more than a mild nudge in one direction or another, and futures prices could remain rangebound.
So I wanted to put the crude oil statistics in terms that could make sense to those of us in the agriculture industry. We may have an automatic feel for what is meant by 100 million bushels of soybeans left at the end of a marketing year or 1 billion bushels of corn remaining as ending stocks. But oil inventories in OECD countries, without even counting government-controlled stocks or the supplies in transit or in storage at wholesalers and end users, reached nearly 3 billion barrels in September, according to the International Energy Agency. Is that a lot?
It sure sounds like a lot, but I don't ordinarily pay attention to how much crude oil gets produced or used around the world. In the United States, weekly ending stocks of crude oil (excluding the Strategic Petroleum Reserve) have been rising in eight of the past ten weekly reports and reached 489 million barrels as of November 27. But is that historically high? How much of a strain on the industry is that?
Originally, I thought I might make a quick and easy apples-to-apples comparison by calculating a stocks-to-use ratio for crude oil, much like we do to compare inventory tightness among crop markets, or to compare one marketing year to the next. In the corn market, for instance, we see that the excess supply expected to remain at the end of the 2015-16 marketing year is 1.76 billion bushels (USDA's projection is subject to change on Wednesday). Expressed as a percentage of total usage during this marketing year, projected to be 13.65 billion bushels, the corn stocks-to-use ratio is 0.129, or 12.9%. That's more "excess" corn than we've seen in some recent years (in 2012, the stocks-to-use ratio was 0.079) but the industry has enough bins and infrastructure to handle it. In 2004, the corn stocks-to-use ratio was as high as 0.198. The present projection for soybeans' stocks-to-use ratio is 0.124, and for wheat it's 0.451.
Unfortunately, I quickly realized that you can't really get a nice marketing year stocks-to-use ratio for oil, a commodity that is constantly being produced and pumped out of the earth every moment. There is no single annual figure to use.
Instead, the energy industry tracks crude oil stocks as "days of supply." This metric is calculated from the weekly ending stocks divided by the four-week average crude oil refinery inputs. Basically, this can be understood by answering the question: "If no more of this commodity could be produced from this moment forward, and all current demand factors remain unchanged, how long would it be before we run out of the stuff?"
In the U.S. at the end of November, those 489 million barrels of crude oil stocks represent a whopping 30 days of supply, seeing that refiners have been using 16.3 million barrels per day lately. That level of supply is well above seasonal historical expectations. The five-year average leading into this November was 24.3 days of supply.
So rather than trying to cram crude oil numbers into the grain market analysis paradigm, I decided it was easier to take the grain numbers and see what they look like expressed as energy statistics. Our stocks-to-use ratio already basically tells us how many "days of supply" would be left at the end of the marketing year if no more grain was produced, but it does so as a percentage. If a stocks-to-use ratio was 0.50, for instance, then there would be enough of that grain left for 50% of the next annual marketing period (assuming constant demand). Fifty percent of 365 days is 182.5 days.
In terms of days of supply, the corn market is projected to have ending stocks worth 47 days of use after the end of the marketing year (August 31, 2016). That means if we didn't grow or import a single bushel, we wouldn't run out of corn until October 17, 2016. Soybeans would run out at roughly the same time -- 45 days after the marketing year ends. Wheat would run out 165 days after its June-to-June marketing year ends, which is to say on November 12, 2016.
But as DTN Analyst Todd Hultman pointed out in a November "Todd's Take" column, wheat has its own definition of normal inventory. It's very common for that market to have a stocks-to-use ratio higher than 30%. So to really get a sense about whether any of these markets are experiencing unusual levels of inventory, I not only calculated their days of supply, but also analyzed those supply levels since 1982 to express each of today's figures as a percentile in a historical range.
Corn's 12.9% stocks-to-use ratio isn't so bearish -- actually in the 13th percentile compared to the historic range between 1995's scary 18 days of supply and 1986's overwhelming 241 days of supply. Soybeans' and wheat's inventory levels are quite normal, both at the 38th percentile of historic expectations.
And it turns out that the crude oil market's big inventory numbers are indeed big any way you look at them. In November 2003, the U.S. was down to 19 days of supply, forming the lower boundary of the historic range. But the last time we had this many days of supply in inventory was back in 1983, so the current numbers have reached the 99th percentile of historic expectations.
In its November Oil Market Report, the International Energy Agency called the global oil stockpiles a "massive cushion" that offers an "unprecedented buffer against geopolitical shocks or unexpected supply disruptions." That's true not only for oil, but also for diesel fuel in the face of a relatively warm winter forecast. So all those bearish headlines are nice news indeed for agriculture producers (fuel consumers), now that we can compare those inventories in our own terms.
Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at firstname.lastname@example.org or on Twitter @elainekub.
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