2019 Diesel Price
A Peek into the Mind of the Forecaster
Since fuel prices make up about a quarter of truckload trucking’s cost, they are worth thinking about, especially if one is making a budget that’s looking out more than a month. I have been forecasting energy prices since the great oil crises of the late 1970s. I don’t peer into a crystal ball. I do that with my football predictions. Rather, I use a blessedly simple, easy-to-understand process. That’s the key to all forecasts – sprinkled, of course, with a little luck. Here is a summarized version of the lessons I have learned trying to forecast fuel prices over a forty-three-year period. The process has five parts:
Part One: Getting historical data.
It’s easy to find.
Unlike many issues in trucking, there is good energy data, and analysis, at our fingertips. Turns out the federal government collects and distributes that data on the Energy Information Administration website. Just type in “EIA” on Google, and you will find yourself there. I regularly check out the pricing information under the “Sources and Uses” link at the top of the site. There you will find historical data and both short- and long-term forecasts. Most of the fuels data I use come from that site. Unless you are really, really into energy matters, most of what you need is there.
Part Two: Are we about to run out of a limited resource?
Not so limited after all!
The first part of any natural resource forecast is to consider whether we are exhausting our supplies. The ocean’s supply of fish is a limited resource that people are using up. If you like to eat halibut, you are paying $29/pound or so in 2019. That’s because fishermen are catching more halibut than the ecosystem can replace. Alternately, you can get frozen salmon at Costco for $6/pound. It’s farm-raised with few limits on quantity.
We used to worry about oil supply because experts thought we were running out. The experts were wrong: oil reserves are elastic to price. When the price goes up, people find more, just like with salmon. We now have almost forty years of data about this elasticity and know that there are more than enough reserves of petroleum (and natural gas) to last until the next set of breakthroughs produces (probably cheaper) alternatives. Such ample reserves mean two things to those of us in the transport industry. We are not going to run out of fuel, and the average price of our fuels will rise slowly as we exhaust the cheapest supplies and burn more of the expensive supplies.
Used to be there were abundant supplies of $2 oil in Texas and Saudi Arabia. Then the average recovery cost moved into the twenty-dollar range. Now it is around $40/barrel. So, if you hear about $70 oil on CNBC, know that market pressures will eventually bring it down – as market pressures brought prices up from the $31 oil we had in 2016. The high-forties oil we have now face some downward pressure, but not much.
Conclusion: The market is near equilibrium. Crude prices should stay in their current area, barring some external economic or political force.
Part Three: Short-run supply and demand.
Calculate surplus production, and you will know much of what is going to happen.
Despite OPEC’s claims to the contrary, market forces largely govern the short-run prices of oil. If demand goes up rapidly, prices rise. If supply jumps up, prices fall. The trick is to measure global production levels and compare them to demand, as I have on the accompanying graph. It shows two things: First, driven by the fracking revolution in the U.S., the gap between demand and supply – the surplus – has increased. That is why prices fell in 2016, when that new fracked oil began hitting the market in a big way. The U.S. is once again the largest global crude oil supplier. That’s a good thing because, as we all know, a bunch of the other big oil suppliers got together to form a cartel aimed at manipulating supply to keep this surplus low. You can thank OPEC for that hundred-dollar oil of 2018.
So, second, one must factor in OPEC policy, as this chart does. The blue bars (left axis) display the surplus between supply and demand if OPEC produces normally. The green bars show the surplus (or shortage) when OPEC restricts production. Those restrictions occurred in 2017 and 2018, throwing the market into shortage, hence the rise into $70 oil. Now the market has responded with more drilling – along with a reduction in demand – to produce enough surplus to overcome OPEC policy, short of bigger reductions than before. This is why prices have fallen below $50/barrel and could fall more – before the drillers cut back and restrict supply again – like they did in 2016.
Conclusion: Prices could fall some more in 2019.
Part Four: Inventories.
Find out if people are sitting on big inventories.
On a daily basis, buyers purchase oil out of inventories. This is important to understand because inventories have a cumulative effect that makes them sometimes give different market signals than the surplus numbers. The accompanying graph from the International Energy Agency, another good free energy analysis source, illustrates this point. Although the black line (latest data) is rising, it is almost on top of the red line representing the average inventory levels. It is at a comfortable equilibrium. We will have to get inventories much higher before downward price pressure from an increasing surplus bears strongly on the market.
Conclusion: prices will probably not fall significantly in 2019, until that black line gets up towards the white area on the chart.
Part Five: Diesel price particulars.
Diesel sometimes has a mind of its own.
In general, diesel prices move in the same direction as crude oil prices. That’s because roughly half of the cost of a gallon of diesel comes from the crude oil from which they refine it. That said, several things cause diesel prices to move independently. First is the matter of refinery distillation mix. Refineries adjust the mix of output from a barrel of crude according to market forces. They do this by adding chemicals and adjusting the distillation process. Without such manipulation, the U.S. refineries would produce more diesel fuel than they do currently. But our market is dominated by gasoline consuming cars, so the refiners “crack” the feedstock to produce a higher proportion of gasoline. It used to be diesel prices were lower in the States because the refiners couldn’t adjust the mix enough. Surplus diesel resulted, a supply that lowered prices and encouraged a large export flow to Europe, where diesel demand is stronger. Recently, however, U.S. diesel demand has risen, (thanks, truckers) and gasoline fractions from the barrel have increased. Diesel prices are up as a result.
In addition, regional supplies of diesel vary due to refinery issues and state regulations. If a reg changes, bad weather hits a region, or a refinery is down for maintenance the price of diesel in the affected region will change more than elsewhere. You can see those dynamics in the accompanying graph which presents changes in the price of crude, diesel, and diesel if it moved only from changes in crude prices. For most of the last four three years, diesel has been lower than that benchmark, indicating something else was going on. It was probably because diesel inventories were 50 million barrels above normal. They have recently receded to almost normal, hence the move of actual diesel (highway diesel) to just above the benchmark level.
Conclusion: Highway diesel is currently priced at a neutral position with little pressure to depart from its normal relationship to crude prices.
The bottom line for 2019: Pretty favorable year with a downside late.
With four of the five parts of the analysis at or close to equilibrium, movement of diesel pump prices from where they are in January appears to be largely influenced by the major positive change in the production surplus. Again, that’s the reason for the recent fall in crude prices. However, the recent uptick in crude prices, coupled with their current position at or below sustainable drilling costs, suggests that further significant retreat is unlikely.
The risk is largely on the demand side. During the last recession, albeit a big one, diesel demand fell by 13% in the U.S. Diesel prices then fell 30% below current levels. As 2019 matures, we are facing an increasing risk of recession, although the risk doesn’t become a major one until the second half of 2020.
Conclusion: Put diesel prices at or slightly below current levels in your 2019 plan. Watch out for a weakening economy, to include global economics. Should the threatened weakness happen early, diesel prices will fall smartly, perhaps 15% below current levels.