Crude oil a game changer?

Crude oil a game changer?

If OPEC does not get its game together, the oil glut has the potential of being the most deflationary "game-changing" fundamental in many years.

*Richard A. Brock, president of Brock Associates, has been publishing "The Brock Report" for more than 30 years. He leads the Brock Associates team and is responsible for the development of marketing strategies. Brock also serves as a commodity marketing adviser and price forecaster to many of the nation's largest agribusiness firms, food companies and financial institutions. He can be reached at [email protected]

Crude oil a game changer?
ALTHOUGH the term "game changer" is used much more frequently than it should, true game changers do occur — although they are rare.

The Thanksgiving meeting in Vienna, Austria, at which the Organization of the Petroleum Exporting Countries (OPEC) could not agree on production cuts to relieve the growing glut of oil supplies may well be looked back on as one of these game-changing events — not just for the energy markets but for a much broader impact on the economy as well as agriculture.

It's ironic that the current situation has come about due to the rapid progress and success in the use of fracking technology, mostly in the U.S.

As a result, our nation's dependence on foreign oil and petroleum products has decreased dramatically since 2006 as domestic production has more than doubled to more than 9 million barrels a day while imports have declined 38% (Figure).

 

Feed industry

This has had several effects on the feed industry. The first and most obvious impact is a decrease in transportation costs.

If crude oil prices continue to drop, fracking will likely slow down — or at least stop increasing as rapidly. This will help ease the railcar backup, making that mode of transportation more economical than it has been over the last year.

Eventually, lower oil prices will spill over and result in slightly lower ethanol prices — but probably very little. The ethanol industry is doing very well, and that is likely to continue. Ethanol exports are extremely strong.

Although dried distillers grain exports to China have slowed to a crawl, dried distillers grain exports to the rest of the world have been better. It is an international market, not just a U.S. market.

Prices for inputs correlated with oil prices will decline over the next 12 months.

Although it has not happened yet, this will also have a negative impact on fertilizer prices.

 

Putting it together

If OPEC does not get its game together, the oil glut has the potential of being the most deflationary "game-changing" fundamental we have seen in many years.

The feed industry as a whole will likely do very well in the coming months as livestock feeding profits will stay strong due to declining feed costs. Expansion in pork and poultry production will also benefit the feed industry.

Volume:86 Issue:52

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