Ongoing Fluctuations in Oil & Diesel Markets Equal Uncertainty for Shippers and Carriers

Crude oil and diesel fuel prices have dropped to historic lows (maybe we can reword this somehow- the lows are not all time historic lows, it is just the greatest decline over a short period of time), and no analyst truly knows the direction they’ll go from here.

“Further drops are possible but not certain,” noted the fuel outlook in Ryder’s February 2015 State of the Industry Report. It projected that drops in U.S. crude prices – already down 40% from their April 2014 high – may continue and that “more declines in the diesel prices are likely.”

Forecasters already were surprised that December crude prices were 13% below their March 2014 high, joined by a 23% drop in diesel, the report noted. A month prior, no analysts were predicting so sharp a decline in crude or diesel. A month later, the information already was stale, as crude and diesel continue changing on a weekly, even daily, basis.

In October 2014, the Department of Energy published its 2015 forecast for diesel at $3.80 a gallon. Since then that figure has been modified three times with the most recent forecast on March 10 projecting 2015 diesel to average $2.89 for the year.

A host of issues are converging to create price volatility. Though they’ve since reached an agreement, a United Steelworkers’ strike that started February 1 at 15 American refineries reduced production, led to a rise in prices at the pump.

Oil companies continue to pump and now are storing excess crude inventories at facilities like the storage hub at Cushing, Oklahoma – the largest such site in North America. Six months ago, reserves at Cushing were at a quarter capacity. Now they’re nearing capacity.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has refused to reduce production. The result: another dip in prices. In the wings, if negotiations with Iran result in easing of sanctions, more oil could hit the world market, creating an even greater surplus.

If we reach capacity, oil companies will have no choice but to begin pushing oil to the refineries. This will create further price declines. Some have estimated West Texas crude to $20 a barrel, from $100 a barrel this time a year ago. Such fluctuations leave carriers and independent drivers to wonder what the future will bring.

Even the International Energy Agency called the apparent stabilization a “head fake” in its March 13 report, noting that much uncertainly remains.

While continued price declines may be good for consumers and shippers, the uncertainty can be unsettling. To be sure, increases in domestic production, capacity surpluses and growing streams of natural gas lessen US dependence on foreign oil.

For shippers, pass-through costs that are regularly adjusted should reveal year-over-year savings. Those shippers using all-in pricing should be negotiating, if possible, for a lower fuel rate. Those who have priced fuel separately from the cost of the freight are refocusing on the benefits of the fuel surcharge.

As with most moments on the fuel-cost continuum, all we can do is wait and see. Carriers and shippers would be wise to keep an eye on fuel surpluses and storage. If trends continue, by Memorial Day we could see surpluses moved into production at the refineries, meaning even lower prices at the pump for shippers and consumers alike.

It’s a tough time to be in the business of forecasting fuel prices. It’s not much easier for shippers and carriers. Best we can do is watch the markets and prepare to be surprised.

Source: Ryder