Tuesday’s sanction-loosening deal between western powers and Iran could exacerbate directional drift between the mineral oil and agricultural commodities which determine the fossil fuel/biofuel spread as oil markets eye swelling global supply over the medium term. Against a backdrop of almost unabated US and OPEC crude oil production, front month ICE gasoil has already fallen nearly 8% from early June peak to current trough, with front month RBOB gasoline down by over 11%. US soybeans, meanwhile, have been on a strong upswing since summer rains began damaging crops in June, gaining 11% from peak to trough. Corn has been on an even steeper upward tear, adding over 23% from its early June lows. Wetter forecasts have helped EU rapeseed futures fall from early July highs, although they are still up 7.6% from June lows.
Discounted biofuels last year triggered a sharp upswing in non-mandated demand before the dramatic slide in crude oil and products prices restored agricultural-based fuels to a premium to their mineral oil equivalents. The current directional split in renewable versus fossil fuel commodities offers little hope of any near term return to the discretional blending which crept into the international biofuels market last year. This was when cheap agricultural feedstocks allowed biofuels to undercut fossil fuels. But cheaper fossil fuel prices should lead to an incremental but steady increase in demand for mandated biofuels in direct proportion to any upswing in demand for cheaper motor fuels.
EIA expects US motor gasoline prices will fall to their lowest April to June level since 2009 this summer. At the same time EIA expects motor gasoline consumption to gain 194,000b/d or 2.1% compared to the year-ago period, reflecting “higher real disposable income, substantially lower retail motor gasoline prices, and higher employment and consumer confidence”.