Happy Presidents Day! NYMEX markets are closed today in observation of the holiday, so fuel prices comes from Globex 24-hr pricing data.
Oil markets are continuing their rebound, following a price correction that lowered prices by $7/bbl. Since falling to a low of $58.20 last week, oil prices opened this morning at $61.63, an overall gain of $3.40 (5.8%) over the past four trading sessions. Today, prices are continuing their ascent higher, with WTI crude gaining 45 cents (0.7%) since Friday’s close to trade at $62.13.
Fuel prices are also at their highest point since the correction began two weeks ago. Diesel and gasoline prices both ended Friday in the black, up 1.6 cents and 0.8 cents, respectively. Today, both prices are still rising. Diesel prices are currently up 1.3 cents (0.7%), trading at $1.9229. Gasoline prices are trading at $1.7577, up 0.7 cents (0.4%).
CFTC data reported on Friday showed that managed money net length has fallen nearly 8% since peaking in early January. Managed money net length shows how bullish institutional investors are on prices. The decline in prices has been accompanied by declining investor bullishness – as investors pulled out of the market, prices fell. The 8% decline shows that markets have been bearish over the last few weeks. On the other hand, markets are now less overextended than before, which could provide a bit more room for prices to rise.
This weekend, Mexico became the 30th member of the International Energy Agency, a coalition of major energy producers made up of OECD nations. Mexico is the first Latin American country to join the agency, which is made up of European countries, Australia, the United States, Canada, Turkey and Japan. Member nations are required to maintain 90 days of oil supply in stock to address global oil disruptions. As a member, Mexico will have a strong voice in effecting change in global energy legislation.
Markets have turned around this week, with the stock market rising and commodities prices both rising in response to a lower dollar this week. Although the week got off to a rocky start, oil prices are returning to their previously high levels. This morning, WTI crude opened above $61 for the first time since last week. Whether or not oil will make its way back to $65 is yet to be seen.
The week changed courses on Wednesday when the EIA showed an overall inventory draw across all oil-based products and a below-expectation crude build. The overall draw halted oil’s decline and helped it reach higher ground. On the flip side, lower refinery utilization will reduce the demand for crude oil, while also causing refined fuel inventories to fall while refineries go through maintenance.
While there hasn’t been a lot of market-moving news this week outside of the EIA report, there has been some speculation regarding OPEC. Saudi Arabia’s oil minister noted this week that OPEC would rather over-shoot five-year average inventory levels than end the cuts early. OPEC’s deal extension came with a potential escape clause if markets are already balanced by June; markets have wondered whether OPEC will use that to end the deal early. The oil minister’s comments gave the market some assurance that the deal will continue this year even if OPEC sends inventories plummeting too low. At the same time, the UAE’s Minister of Energy mentioned that plans are underway to sign a long-term OPEC framework for oil supply management.
Crude oil prices began the week at $59.12, more than 9% below last week’s opening price. Markets reached a low point of $58.20 on Wednesday morning, but rallied after the EIA’s report of a smaller-than-expected crude inventory build. A draw in Cushing, OK inventories also helped give prices a boost. Prices surpassed $60/bbl on Wednesday, and opened this morning at $61.45, a gain of $2.33 (3.9%) for the week.
Diesel prices traded in line with crude oil this week. Opening at $1.8510, prices bottomed out at $1.8084 on Wednesday, the lowest prices have gone since October 2017. Today, prices opened significantly higher at $1.8944. Overall, diesel prices rose 4.3 cents, or 2.3% – slower than crude’s gains, but still a reversal from last week’s downward trend.
Gasoline prices opened the week at $1.7029, the lowest weekly open since mid-December. Unlike crude and diesel prices, gasoline prices bottomed out on Tuesday at $1.6519, making Wednesday’s bounce a bit less pronounced in the chart. Still, gasoline ended the week at $1.7426, a 4 cent (and 2.3%) gain.
WTI crude oil is back above $60/bbl today, thanks to an EIA inventory report that underperformed expected stock builds and a declining dollar. Yesterday saw prices rise by over $1.60 (2.8%), reversing early morning losses. Although prices are trending slightly lower today, the reversal shows there is support to keep prices elevated in the $60/bbl range. WTI crude is currently trading at $$60.41, a small decline of 19 cents.
Refined fuels enjoyed similar huge gains. Diesel prices soared five cents (2.9%), and gasoline prices picked up almost four cents (2.4%). Today gasoline prices remain strong, treading in positive territory to stay at $1.7141. Diesel prices have given up some of yesterday’s gains, trading 1.6 cents (-0.9%) lower at $1.8681.
The EIA’s report yesterday gave markets support yesterday, with crude and diesel stocks underperforming market expectations. In addition, inventories at Cushing, OK (the delivery point for WTI crude) fell by 3.6 million barrels (MMbbls). All NYMEX WTI crude prices are driven by supply and demand in Cushing, OK – when Cushing supplies fall, it props up WTI prices relative to other indexes such as Brent.
In addition to falling stocks overall, the EIA report showed that refinery utilization is winding down as we move into refinery maintenance season. Overall refinery utilization fell from 92.5% to 89.8% this week, with several Gulf Coast refineries off line. Crude imports and exports held fairly steady, though both gasoline and diesel saw large declines in import and export activity.
The Trump Administration hinted recently at a 25-cent gasoline and diesel tax hike to fund Trump’s infrastructure bill. Proceeds from the tax rate increase would fund the Highway Trust Fund to repair roads throughout the country. This isn’t the first time Trump has mentioned the idea – in January, Trump indicated that every option is on the table to pay for his infrastructure plans, including an increase to a 50-cent fuel tax.
While the tax hike would significantly increase consumer costs, it would not be unprecedented. Diesel taxes in the U.S. are 24.4 cents per gallon currently, while gasoline taxes are 18.4 cents; these numbers have not changed in years, making them a prime target for increases. The U.S. has some of the lowest fuel taxes in the world, as well as the lowest taxes among OECD nations. Check out our in-depth analysis on tax rates from 2017.
This week oil markets hit the “undo” button and reversed all of 2018’s gains to date. Where January brought stock draws and strong economic growth projections, February so far has delivered rising inventories and some of the largest single-day stock market losses in history. Is this the reversal we’ve been waiting for so long? Or is it merely a correction as the market rises higher?
It’s too soon to tell if this week’s data is a mere interruption or a new trend. A few trends suggest that, at least until spring, prices could remain at current lower levels.
Brent-WTI spreads, the difference between international Brent prices and U.S. WTI prices, has fallen below $4 recently. Although new infrastructure to the Gulf Coast makes it cheaper to export than it used to be, sub-$5 spreads reduce arbitrage opportunities, dampening the call for U.S. exports. That will help keep inventories in the U.S., meaning more crude being placed in inventories.
Another important statistic, 3:2:1 Crack Spreads, fell below $16 this week. The crack spread is a rough estimation of refiners’ margins, representing the market profit from refining three barrels of crude into two barrels of gasoline and one barrel of diesel. Spreads have been narrowing slowly since September, but only in the last few weeks have they fallen below historical averages of roughly $17/bbl. Lower 3:2:1 spreads indicate that refiners have less incentive to produce refined fuels, meaning less crude will be pulled from storage to be converted.
I say prices could stay this level until spring because that’s when refinery maintenance ends and consumer demand picks up. Spring isn’t far away, so take advantage of lower prices while you can. Markets still have a price structure that incentivizes suppliers to empty their inventories, which means supplies should remain tight. Once demand returns, expect prices to rise rapidly, closing the window of opportunity to lock in lower prices.
As we noted above, prices have fallen rapidly this week. Part of the struggle for crude markets was pressure coming from a rising dollar and threats of future interest rate increases. A stronger dollar creates headwinds for oil prices, since the dollar is the main currency backing oil markets. As the economy strengthens and the Federal Reserve increases interest rates, oil prices could take a hit. At the same time, large stock builds this week and last ended the long string of inventory draws stretching back to November, which has rattled market confidence.
Prices began the week above $65/bbl, and rose to a peak of $65.40 this week before beginning the precipitous decline. Today’s opening price of $61.70 marks the lowest crude opening price since early January. Of course, just a few months ago, prices above $60 would have been considered a shock; now, it’s a nice reprieve from the extremely high prices seen in the last few weeks. Since peaking on January 29, crude prices have fallen 8.2%.
Diesel’s decline has been precipitous, dropping rapidly below the $2/gal level. For weeks, diesel prices have been elevated above $2/bbl, which many commentators believed was too high relative to crude’s level. While crude has been falling 8.2%, diesel has been falling much faster, giving up 11.4% in the past 1 ½ weeks.
Diesel prices began the week at $2.0450, down slightly from their highs last week. Prices have fallen non-stop since that opening price, reaching a low point today at just over $1.90. Falling fifteen cents in a week, diesel prices are now a better value relative to crude oil.
Gasoline prices have also fallen more than 10% since peaking last week, with prices falling this week from $1.87 on Monday down to $1.75 today, a 12-cent loss. With seasonally weak demand and low refinery through puts currently, gasoline markets are not looking to make waves. Like other products, gasoline inventories rose this week, which has kept downward pressure on prices.
The price of Brent crude oil averaged $54/barrel (b) in 2017, an increase of $10/b from 2016. EIA’s January Short-Term Energy Outlook forecasts Brent to average $60/b in 2018 and $61/b in 2019. In both 2018 and 2019, EIA expects total global production to be slightly greater than global consumption, with U.S. production increasing faster than production in any other country, contributing to modest inventory builds.
EIA forecasts the West Texas Intermediate (WTI) crude oil spot price will average $55/b in 2018 and $57/b in 2019 (Figure 1). Average WTI crude oil prices are forecast to stay between $4/b and $5/b lower than Brent prices in both 2018 and 2019, falling from the $6/b average price difference seen in the fourth quarter of 2017. The narrowing price discount of WTI to Brent in the forecast is based on the assumption that current constraints on the capacity to transport crude oil from the Cushing, Oklahoma, storage hub to the U.S. Gulf Coast will gradually lessen.
Because U.S. production increases will need to compete for market share in Asia, the difference between Brent and WTI prices is supported by cost differences to get there. EIA estimates that, without pipeline constraints, moving crude oil from Cushing to the U.S. Gulf Coast typically costs $3.50/b and that it costs approximately $0.50/b more to transport WTI from the United States to Asia than to ship Brent from the North Sea to Asia. Although more infrastructure to export crude oil has been recently built, U.S. exporters must still use smaller, less-economic vessels or complex shipping arrangements, which add to costs.
EIA estimates that the implied global stock change (the difference between total world consumption and total world production) averaged 0.4 million barrels per day (b/d) in 2017, marking the first year of global inventory draws since 2013 (Figure 2). EIA expects global inventories to increase by about 0.2 million b/d in 2018 and by about 0.3 million b/d in 2019. EIA forecasts that the expectation of inventory builds in 2018 and 2019 will contribute to Brent crude oil prices declining from current levels ($69.08/b on January 9) to an average of $60/b during the first quarter of 2018.
Despite the prospect of flat crude oil prices into the future, EIA forecasts total U.S. crude oil production will increase to an average of 10.3 million b/d in 2018, up 1.0 million b/d from 2017. That level would be the highest annual average on record, surpassing the previous record of 9.6 million b/d set in 1970. In 2019, crude oil production is forecast to rise to an average of 10.8 million b/d. The Permian region alone is expected to produce 3.6 million b/d of crude oil by the end of 2019, which is about 33% of total U.S. crude oil production and about 0.8 million b/d more than estimated December 2017 levels.
Crude oil production from the Organization of the Petroleum Exporting Countries (OPEC) averaged 32.5 million b/d in 2017, a decrease of 0.2 million b/d from 2016. The decline was mainly a result of the November 2016 OPEC production agreement that aimed to limit OPEC crude oil output to 32.5 million b/d. OPEC and non-OPEC participants agreed on November 30, 2017 to extend the production cuts through the end of 2018 in an effort to reduce global oil inventories. EIA expects OPEC crude oil production to increase by 0.2 million b/d in 2018 and by an additional 0.3 million b/d in 2019 as it slowly returns to pre-agreement levels.
Global consumption of petroleum and other liquid fuels grew by 1.4 million b/d in 2017, reaching an average of 98.4 million b/d for the year. EIA expects consumption growth will average 1.7 million b/d in 2018 and 1.6 million b/d in 2019, driven by the countries outside of the Organization for Economic Cooperation and Development (OECD). Non-OECD consumption growth is expected to account for 1.2 million b/d and 1.3 million b/d of the growth in 2018 and 2019, respectively. The forecasted non-OECD petroleum and other liquid fuels consumption growth is driven by expectations of increased Gross Domestic Product (GDP) growth. Growth in non-OECD GDP is expected to be 4.3% in 2018 and 4.4% in 2019, up from 3.9% in 2017.
Of the non-OECD countries, EIA expects India and China to be the largest contributors to growth in petroleum and other liquid fuels consumption in both 2018 and 2019. China’s consumption is expected to increase by 0.4 million b/d in 2018, followed by a 0.3 million b/d increase in 2019. India, which saw slower-than-expected liquid fuels consumption growth of less than 0.1 million b/d in 2017 (partly because of monetary and fiscal policy changes) is expected to experience stronger consumption growth in 2018 and 2019 at about 0.3 million b/d in each year.
In OECD countries, petroleum and other liquid fuels consumption increased by 0.4 million b/d in 2017, and EIA then expects it to grow by 0.5 million b/d in 2018 and by 0.3 million b/d 2019. The main driver of OECD consumption growth is the United States. Total U.S. petroleum and other liquid fuels consumption is forecast to average 20.3 million b/d in 2018, an increase of 470,000 b/d (2.4%) from the 2017 level, and is forecast to grow by 340,000 b/d (1.7%) in 2019. The growth in both years is led primarily by higher consumption of hydrocarbon gas liquids with more modest increases in distillate, motor gasoline, and jet fuel.
U.S. average regular gasoline and diesel prices increase
The U.S. average regular gasoline retail price rose slightly from the previous week, remaining at $2.52 per gallon on January 8, 2018, up 13 cents from the same time last year. The West Coast price rose nearly four cents to $3.01 per gallon, the East Coast price rose one cent to $2.50 per gallon, and the Gulf Coast and Rocky Mountain prices each rose less than one cent, remaining at $2.24 per gallon and $2.44 per gallon, respectively. The Midwest price fell nearly three cents to $2.43 per gallon.
The U.S. average diesel fuel price rose more than 2 cents to $3.00 per gallon on January 8, 2018, 40 cents higher than a year ago. The East Coast price increased nearly five cents to $3.03 per gallon, the West Coast price increased three cents to $3.39 per gallon, and the Midwest and Gulf Coast prices each increased over one cent to $2.95 per gallon and $2.79 per gallon. The Rocky Mountain price fell less than one cent to $2.97 per gallon.
Propane inventories decline
U.S. propane stocks decreased by 6.3 million barrels last week to 61.7 million barrels as of January 5, 2018, 10.2 million barrels (14.2%) lower than the five-year average inventory level for this same time of year. Midwest, Gulf Coast, East Coast, and Rocky Mountain/West Coast inventories decreased by 2.8 million barrels, 2.6 million barrels, 0.7 million barrels, and 0.2 million barrels, respectively. Propylene non-fuel-use inventories represented 4.0% of total propane inventories.
Residential and wholesale heating fuel prices increase
As of January 8, 2018, residential heating oil prices averaged almost $3.18 per gallon, 9 cents per gallon more than last week and 53 cents per gallon higher than last year’s price at this time. The average wholesale heating oil price for this week averaged nearly $2.20 per gallon, nearly 2 cents per gallon more than last week and almost 43 cents per gallon higher than a year ago.
Residential propane prices averaged $2.55 per gallon, 3 cents per gallon more than last week and 25 cents per gallon higher than a year ago. Wholesale propane prices averaged nearly $1.15 per gallon, 3 cents per gallon more than last week and 29 cents per gallon higher than last year’s price.
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.