After some mixed results yesterday, markets are trending higher today. WTI crude oil saw 34 cent (0.6%) gains yesterday, and prices are sustaining this morning, picking up another 7 cents. WTI is currently trading at $57.11, which is $6.15 higher than Brent crude oil. Recall that Brent-WTI spreads have been a growing topic when it comes to exports, and the pipeline outage in the U.K. had further exacerbated the spread. Now, Brent-WTI spreads are back to their recent average near $6.
Refined products moved in different directions. Diesel prices held onto small losses, dropping by just a quarter of a cent. Gasoline, on the other hand, picked up 1.7 cents, rebounding from the massive losses seen on Tuesday and Wednesday. This morning, diesel prices are rebounding, picking up .72 (0.4%) to trade at $1.9171. Gasoline prices are sustaining yesterday’s gains and continuing higher, rising 0.4 cents to trade at $1.6747.
Although markets have calmed following the outage of the Forties Pipeline in the U.K., repair work continues on the pipeline. Each day, 300 thousand barrels of crude are not finding their way to the market, creating local outages. Companies operating in the North Sea have declared force majeure for the first time in 40 years.
The IEA yesterday published their December Oil Market Report, which noted that 2018 could be a tough year for OPEC. While OPEC has held tightly to their cuts, other producers have grown their market share, and the IEA expects that trend to continue next year. Overall, the group expects a slightly oversupplied market in the first half of 2018, along with a slight under-supply in the second half of the year.
As we close the week, it looks like prices could once again close for a loss, which would be the third week of losses in a row. Over the past two weeks, prices have fallen from $58.95 all the way to $57.36 last Friday. Prices remain, however, at a higher level relative to the first ten months of the year, a trend unlikely to change before the end of the year.
This week has been short on market-moving headlines, so traders have been digging into the fundamentals. Several agencies, including the IEA, EIA and OPEC, reported on global supply and demand trends this week, giving plenty to support both the bulls and the bears. OPEC’s report made little change to previous expectations. The EIA forecasts an increase in U.S. domestic supply in 2018, along with a small upward revision to Chinese demand statistics. Compared to last year, their overall expectations for supply/demand balance in 2018 shifted from consistent oversupply to a more balanced (and bullish) picture, with demand outpacing supply until the second half of the year. Still, the report had a net-bearish slant, as rising U.S. production is offsetting much of OPEC’s cuts.
On the other side, the International Energy Agency (IEA) continues to show supply outpacing demand, leading to an over-supplied market in the first half of 2018. Forecasted supply rose, while demand expectations stayed the same as last month. The agency noted that U.S. production was particularly challenging to forecast given the complexity of responses to higher prices – many companies are using higher prices to consolidate their current activities, rather than drill new wells. Since U.S. production is driven by companies beholden to shareholders, rather than controlled by the government, they are less predictable. Overall, however, the agency stated, “[O]ur current outlook 2018 may not necessarily be a happy New Year for those who would like to see a tighter market.”
This week, crude prices opened lower at $57.25, and opened this morning at $57.15, a meager ten-cent loss. Prices are on the rise this morning as well, so it’s likely those gains could be completely wiped out. While much of the fundamental reports were bearish for prices, the EIA did report a sizable stock draw for the week, which helped to temper any downward trends.
Diesel prices also opened today with a net loss for the week, but daily gains could counteract those losses and put the week back in the green. Diesel did show a small draw on Wednesday, which helped to keep losses muted. Overall diesel prices tracked closely with crude oil prices.
Gasoline prices fell 4 cents between Monday’s opening and today’s opening price, and today’s gains are unlikely to bring prices back to positive territory. Wednesday saw a large stock build in the EIA statistics, which caused prices to plummet. Prices have rebounded since then, but have not given up their Tuesday and Wednesday losses.
Mansfield has noticed growing interest in price risk management tools. Fleet managers who set their budget in the beginning of 2016, when crude prices were below $40/bbl and diesel wholesale rates were $1.00 or less (excluding tax), have felt the pressure of rising prices. With many analysts pointing to diesel wholesale prices surpassing $2.00 next year, how will you protect your fuel budget?
The chart below shows historical volatility. Volatility is the amount of uncertainty or risk in price moves. The higher the volatility, the more uncertain its price variance. Crude prices, the key input to refined fuels, is by far the most volatile of the bunch.
Whether you are a trucking company with customers that won’t accept fuel surcharges (as some customers ask to be billed on a fixed price basis) or a construction company that cannot raise prices once a project starts, odds are good you have some price risk. Mansfield sees customers in every industry struggling with fuel price risk.
When it comes to recognizing your price risk, it’s important to keep in mind: Analysis is key. You may find that your company is large enough that you may need to reach out to fellow colleagues to make sure the risk you think you have is indeed a risk to the company. Some companies use risk management tools at the corporate treasury/CFO level, but do not communicate that down to the fleet managers. That’s an important policy to understand at your company.
As you begin setting fuel budgets, the question you’ll want to ask is, “Does my company have fuel price risk?” Along the same lines, you may ask, “Can my company pass along fuel costs?” Can you pass rising fuel costs along to your customers in the form of fuel surcharges, or a straight pass through without sacrificing competitiveness? If you cannot pass along your fuel costs, then you certainly have price risk, and you need to seek out tools to manage it.
If you’d like to learn more, I’m hosting a free webinar today at 1PM ET: 4 Rules for Successful Price Risk Management. The four rules will give you a framework for protecting your company from volatile prices.
Click here to reserve your seat. If you’re not able to attend today, the recording will be available on demand for those who register.
Oil prices are generally seeking higher ground, responding to yesterday’s EIA inventory report. Crude prices are up $.50 today to $52.64, after trading flat yesterday. Just last week, crude prices peaked above $50 for the first time in months; in the past, prices hitting $50 has triggered selling and traders bidding the market down again. This time prices have held their ground, signaling the bullish sentiment in the market.
Refined products are mixed. Diesel is flat at $1.8471, after trading slightly lower yesterday. As the Market at a Glance chart below shows, diesel prices have broken out and soared higher, gaining over 40 cents since June. The
Gasoline is a bit lower this morning, down roughly a penny from yesterday’s close to $1.6442. Gasoline gave up almost four cents yesterday in response to the EIA’s inventory report, bringing it back down from highs earlier this week. Prices are up from this morning, when prices opened in the $1.63 range.
The EIA released their inventory report yesterday, and markets are finally beginning to respond to the EIA’s report, with stock movements more or less inversely correlated with price. Crude stocks fell 1.8 million barrels (MMbbls), a larger draw than the API predicted and a complete reversal from the market’s expected stock build. Crude stocks have built 15 MMbbls over the past month following Harvey, so the draw is seen as a strong sign of market normalization. Gasoline also proved to be a surprise player, with a 1.1 MMbbl build, compared to an expected stock draw.
On the international front, tensions are escalating in Iraq. After a 93% vote by Kurds in favor of independence, Iraq is moving troops into Kirkuk, one of the contested areas, to take control of oil fields in the area. Turkey continues to support Baghdad, hoping that a decisive response to the referendum will help prevent the movement from spreading to Turkish Kurds. Turkey PM Erdogan has warned that the nation may close off the pipeline that connects the Iraqi Kurd’s oil fields to outside markets. Markets are closely watching to see if the situations devolves into conflict and instability, particularly focusing on how the situation will affect oil production.