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Oil Price Spike Supports Corn, Ethanol

Oil Price Spike Supports Corn, Ethanol

By Todd Neeley

The price of crude oil reached 8-month highs Tuesday, driven by news of soon-to-arrive COVID-19 vaccines among other issues.

Though the higher prices on the January futures generally are supportive of corn and ethanol prices, DTN Lead Analyst Todd Hultman said corn and ethanol market effects are more long-term as the overall world economy continues to grow.

Brent crude oil futures on Tuesday reached nearly $48 per barrel, nearly a 4% spike. West Texas Intermediate crude oil futures eclipsed $45 a barrel, more than a 4.5% jump.

This is the third consecutive week drug companies announced successful phase-three COVID-19 trials with plans to distribute doses yet in 2020.

The oil market saw a more bearish outlook in late October when crude oil prices fell to a 5-month low on the end of the driving season and rising COVID-19 cases in the United States and the European Union, Hultman said.

"That bearish outlook has now been replaced by a more hopeful view that economic activity won't have to suffer as long as previously feared," he said.

"The new view is more bullish for commodities generally, especially for livestock markets that need processing plants to stay open and functioning. In the case of crude oil, the anticipation of increased driving activity is supportive for both oil and corn prices via ethanol demand."

RECENT CORN RALLY

The recent rally in corn prices comes as a result of a shortage in China and led to increased purchases from the U.S.

"Corn is also in a situation where South America's weather has been on the edge of being too dry and those concerns are also raising bullish potential for prices," Hultman said.

March corn closed at $4.32 1/2 Tuesday.

"The vaccine news and crude oil influence is mildly supportive to corn prices but doesn't compare to the more bullish influences," he said.

It will take time for the economy to recover, Hultman said, but the vaccine news is easing pressure.

"Things won't go straight up but getting rid of the bearish weight of coronavirus is bullish for the U.S. and world economy and for economic demand," he said.

"The Fed (federal reserve) has interest rates near zero and OPEC and Russia have cut oil production to help get through the low-demand period, so there is room for oil prices and commodities in general to trade higher."

FUEL DEMAND YET TO RETURN

Brian Milne, editor and product manager at DTN, said while the rise in the oil market is good, full demand recovery is yet to come.

"The development (vaccines) bolsters the case for increased oil demand, although the market is likely getting ahead of itself because the demand recovery might not be seen until the second quarter 2021 or later," he said.

This week, ethanol stocks in the U.S. hit an 11-week high, while at the same time demand is at a 22-week low.

Milne said the ethanol industry should go easy on production in order to keep the price rising. Higher gasoline and diesel prices lift ethanol and biodiesel prices.

"However, if output, namely ethanol production, increases too much, it will undercut the advance," he said.

"Additionally, gasoline demand remains weak and a pop in diesel demand we saw a month ago is fading, so the durability of the uptrend has limits."

Milne said the oil rally may be difficult to sustain until the COVID-19 vaccines can be widely distributed.

"The oil market might continue to look past this fact in the short run, especially if Congress passes more stimulus," he said.

Republicans and Democrats in Congress remain worlds apart on a possible new round of COVID-19 economic stimulus.

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