*FUELSNews will resume on Tuesday, May 29thafter Memorial Day.
The energy complex is trading sharply lower this morning. Crude lost over a dollar yesterday due to a bearish EIA reporting a large build in crude inventories and OPEC chatter. Crude prices are continuing to trade lower this morning, down another $1.59 (2.25%) at $79.12. This is the first time oil has fallen below $70/bbl since May 8.
Fuel prices are also plummeting this morning. Diesel prices are currently trading at $2.2268, down nearly 4 cents (1.78%) since yesterday. Gasoline prices are $2.1918 currently, a loss of 4.2 cents (1.88%).
Weakness in prices this morning can be mostly attributed to news that OPEC and Russia are discussing increasing oil output by nearly 1 million barrels per day. This increase would bring OPEC compliance back down to 100% from its recent April compliance of 152%. Secretary-General Mohammad Barkindo said OPEC leaders began the discussion following a tweet from President Trump who accused OPEC of “artificially” boosting prices.
Up to this point, OPEC has seen no reason to ease production cuts. However, worries about supply after the U.S. withdrew from the Iran Nuclear Deal in conjunction with Venezuelan’s oil collapse have spurred OPEC to rethink their original mindset. Russia and Saudi Arabia met for the discussion in St. Petersburg this week, but a final decision will not be made until the official meeting in Vienna on June 22-23.
As we head into the holiday weekend, a storm is brewing in the Gulf Coast. A tropical depression is expected to from in the Gulf of Mexico over the weekend bringing heavy rain and the potential for flash flooding in the Southeast and Florida. Monday and early Tuesday deliveries could possibly be delayed due to high winds and flooding between Louisiana and the Florida Panhandle. Mansfield will continue to monitor the status of the storm.
This week, oil prices have trended negatively, with traders shedding their positions following a bearish inventory report. Crude inventories rose by over 5 million barrels the week before Labor Day, when prices are historically reaching their peak. It’s an unusual dynamic, but then again prices have been unusual this year compared to the last few years.
The irony if this week’s decline is that traders are increasingly betting on higher prices for the rest of the year. Options markets are showing the equivalent of 93 million barrels bet on Brent crude oil hitting $100 this year. Behind these bets is the expectation of declining production globally, which the U.S. and OPEC could have a hard time counteracting. Merrill Lynch expects prices could reach $100 by the middle of next year leading up to changes in maritime fuel spec. Other banks have predicted $90/bbl crude this year.
Of course, inventories will dictate whether these analyst forecasts are achievable. Tight supply will show up in the form of declining inventories, so markets are highly reactive to what inventories do. Rising crude inventories are counter-seasonal for late May, so they disrupt the narrative of higher prices. But one week’s inventory data does not identify a trend. The long-term trend is lower crude and fuel inventories, and it will take a long-term change to disrupt that trend.
WTI crude oil opened the week at $71.47/bbl, one of the highest weekly opening prices in years. Prices rose on Tuesday, reaching a peak of $72.83 before beginning to decline. Wednesday’s crude inventory build was the turning point, with prices falling about a dollar lower than Tuesday’s high.
The bearish response has continued throughout the week, with crude oil prices opening at just $70.65 this morning, a loss of 82 cents. Crude is trading below $70 currently. Friday afternoon rallies are not uncommon, however, so don’t rule out the possibility of the week closing above $70.
Diesel prices managed to hold their ground for much of the week, but today are shedding gains rapidly along with crude. Prices opened the week at $2.2655 and rose to just shy of the $2.30 mark. A diesel inventory draw helped to keep diesel prices elevated, but this morning the product is reacting to lower crude prices. Diesel opened at $2.2648 this morning, very close to the week’s opening price. Unless losses are reversed this afternoon, though, the week appears destined to end well in the red.
Gasoline prices, like diesel, opened this morning very close to their Monday opening price of $2.2333. Gasoline has traded a few cents behind diesel prices, at times closing the gap but usually falling back to trade 2-3 cents below diesel. Like diesel, gasoline prices appear poised to end the week in the red, absent any major market rally.
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China’s Counterpunch to Trump’s Tariffs Spark Global Selloff
China today announced tariffs on $50 billion worth of U.S. imports, a response to Trump’s issuance of tariffs on $50 billion worth of Chinese goods. Of course, China’s tariffs would affect one-third of imports from the U.S., while Trump’s tariffs impact less than one-tenth of imports from China. The escalating trade tensions have caused concerns for markets, who fear that negotiations will not succeed. Click Here to read more from Bloomberg.
ATA Economist Forecasts Strong Trucking Outlook for Next 18 Months
According to American Trucking Association economist Bob Costello, the trucking industry is enjoying its best growth rate since the Great Recession ended, and strong growth should continue over the next 18 months. Threats to growth are mainly self-imposed, coming from tariffs and other trade barriers put up by President Trump. Click Here to read more from Trucks.com
U.S. Crude Production Grew 5% in 2017
U.S. crude output rose by 5% in 2017 relative to 2016, and in November 2017 reached the highest production level in U.S. history. Strong growth over the past few years sets the stage for production to surpass 10 million barrels per day (MMbpd) on an annual basis in 2018, reaching over 11 MMbpd by 2019. Click Here to read more from the EIA.
EPA Gives Large Refiner a ‘Hardship’ Waiver from Regulations
The EPA surprised markets by granting Andeavor, one of the nation’s largest refining companies, a hardship waiver from renewable volume requirements. Hardship waivers are generally only granted to very small refineries, producing less than 75 kbpd. The waiver applies only to Andeavor’s smallest refineries, but it’s still unusual to grant waivers to such large companies. The decision was a blow to the biofuels industry – not holding refiners responsible to meet biofuel volume obligations means less demand for biodiesel and ethanol, and as a result less renewable usage in fuel. Click Here to read more from Reuters.
Rex Tillerson’s Firing Adds Risk Premium to Market
Yesterday Trump announced Rex Tillerson, Secretary of State and former Exxon-Mobil CEO, was being replaced by Mike Pompeo, Director of the CIA. The decision (which Tillerson reportedly learned about via Twitter) adds much uncertainty to oil markets, as well as to international politics and economics. Pompeo supports sanctions on Venezuela and opposes the Iran Nuclear Deal, two policies that could lead to significant oil price increases. Click Here to read more from CNBC.
Venezuela’s Oil Production Declines
Venezuela has been a major source of volatility for oil markets – their economic woes have caused weak investments in oil fields, resulting in declining production. Declines are likely to continue for a number of reasons – rig counts have fallen, workers aren’t being paid, and capital expenditures have fallen. According to the EIA, production losses are expected to continue through the end of 2019. Click Here to read more from the EIA.
Driver Compensation Trends
Struggling with driver turnover? So is the rest of the industry. But a study of thousands of driver surveys reveals a few companies are getting it right. What does it take to motivate and retain drivers? Click Here to read more from Fuels Market News.
Glut or Deficit?
With so many different forecasts and variables pointing to supply gluts or deficits in the future, which will it be? Analysts tend to agree that over the medium-to-long term, supplies will not keep up with demand due to a shortage in investment in new drilling. However, in the short-term, both are in balance currently. The most likely scenario for short-term imbalance is a supply glut if economic growth sputters, which is possible given a potential trade war if Trump continues to impose tariffs on other countries. Click Here to read more from OilPrice.com.
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Fed Chair Powell’s Commentary Sends Oil Prices Lower
Powell’s announcement yesterday of strong economic growth and “further gradual increases” in interest rates have increased market odds of four rate increases this year rather than three. Bond markets and the dollar rose in response to his comments, sending equities and commodities lower. Click Here to read more on why the Fed’s remarks sent oil prices lower.
IEA: U.S. set to overtake Russia, become largest oil producer
After surpassing Saudi Arabia to become the 2nd largest producer in the world, the U.S. is on track to take the lead spot from Russia this year or next, according to the IEA. The U.S. surpassed 10 million barrels per day (MMbpd) in Q4 2017, while Russia’s production fell throughout the year to its current level of 11 MMbpd. The IEA expects U.S. production to surpass 11 MMbpd by the end of 2018, so if Russian production remains steady, the U.S. will take the lead position. Click Here to read more from MarketWatch.
Middle East Strife May Cause Long-term Oil Struggles
While U.S. production is the hot topic currently, many analysts believe that the Middle East will remain the key area for production over the long-term. However, geopolitical fighting between countries could put production in jeopardy. Demand will continue growing over the coming decade, but U.S. production will likely peak in the 2020s. If Middle Eastern countries are unable to meet demand, the world may struggle to find sufficient oil. Click Here to read more from Business insider.
New ATA Initiative Highlights Cost of Poor Infrastructure
The American Trucking Association launched a new initiative this past week to show the high costs of traffic congestion and poor road conditions. The campaign, called Road to a Better Future, includes educational materials and calls to action on ways to get involved in effecting change. The campaign points out the cost of doing nothing and letting infrastructure continue to crumble. Click Here to read more from the ATA.
Markets continued the swing higher this week following the correction earlier in February. The last week of January brought a large 6.8 MMbbl crude stock build, causing markets to shudder. February so far has brought only a mild build – two weeks ago, inventories rose 1.8 MMbbls, and yesterday stocks reportedly fell 1.6 MMbbls. The steady inventories we’ve seen over the last two months is counter-seasonal, likely attributable to on-going production cuts by OPEC.
Like last week, inventory reports were the major turning point of the week. Prices fell throughout the week, but turned around when the EIA reported a net crude stock build. Continued draws at Cushing, OK, the delivery point for WTI crude, contributed to the decline as well. Crude oil exports above 2 MMbpd helped to keep stocks low, though crude production above 10.2 MMbpd kept upward pressure on stocks. The fact that crude inventories fell in the midst of refinery maintenance season is astounding, given that refinery inputs fell 320 kbpd this week.
Crude prices began the week after a lazy three-day weekend, taking Presidents Day off on Monday. Starting the week Tuesday at $61.63, prices reached a low point of $60.75 on Thursday before rebounding, reaching a high above $63. Prices opened Friday at $62.60, a gain of a dollar (1.6%) for the week.
Diesel prices appear more dynamic, but actually have mostly tracked crude prices on a percentage basis. Diesel prices opened the week above $1.91, falling in line with diesel prices. A larger 2.4 MMbbl draw from diesel stocks gave prices a boost on Thursday, rising from a low of $1.916 to a high of $1.958. Today, prices opened at $1.9461, lower than yesterday’s high, but still showing a gain of 3.2 cents (1.7%).
Gasoline prices sputtered a bit, with an inventory build this week putting a damper on prices. High production levels have outpaced strong exports, leading to continued builds while winter gasoline demand remains moderate. Gasoline began the week at $1.7489, and each day has only managed to post moderate gains. Today’s opening price of $1.7661 represents a mere 1.7 cents (1.0%) gain.
Have an article worth sharing? Send it to FUELSNews@mansfieldoil.com, and we’ll share it next week in our Weekly Summary segment.
OPEC Searches for New Cuts Criterion
When OPEC first passed their production cuts in 2016, their goal was to return inventories to 5-year averages. They’ve nearly achieved this goal, but prices are less stable than they would like. Now, OPEC must find new criterion for their cuts to justify continued quotas in 2018. Whether they choose days of supply, or a different five-year period to use for their averages, the result will likely be continued cuts in 2018. Click Here to read more from Bloomberg.
Venezuela Launches Oil Cryptocurrency
Facing a failing economy and sanctions on economic activity, Venezuela has launched a cryptocurrency called the “Petro” to raise cash. Each Petro is backed by a barrel of Venezuelan crude oil. The price was set at $60 for the 100 million Petros sold, giving Venezuela the potential to make $6 billion, a small portion of its $150 billion debt. In theory, the move gives Venezuela the cash upfront to pay off their debts, while committing 2-3 months of production via cryptocurrency. How it works out in practice is anyone’s guess. Click Here to read more from BBC News.
Trump Supports Higher Fuel Tax
President Trump has suggested he’s open to raising the fuel tax. Federal fuel taxes have not been changed in 25 years; during that time, inflation and higher fuel mileage have degraded the value of the fund. Fuel taxes are meant to pay for infrastructure projects, specifically in relations to the national highway system, but the budget has been underfunded. Industry groups such as the American Trucking Association are advocating for a 20-cent tax increase over the next four years to pay for infrastructure, while conservatives oppose any tax hike. Click Here to read more from CNBC.
Supertanker Sets Sail from US to China
Super tankers, the largest category of fuel tanker ship, set sail from the U.S. to China. The voyage is significant as the first time a super tanker has sailed directly from a U.S. port. The Louisiana Offshore Oil Port, or LOOP, is America’s first deep water port, capable of harboring massive tankers. The event shows that U.S. exports are flexing their muscle and creating the infrastructure needed to significantly boost exports. Click Here to read more from Bloomberg.
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.