Ride it out

The downturn in crude oil prices (Chart A) that lowered diesel fuel prices is not the result of large changes in crude oil supply and/or demand factors, but rather from repercussions of the European sovereign debt crisis. The printing of money by the U.S. Federal Reserve, Bank of England, European Central Bank, and Bank of Japan had depressed yields on government bonds, causing investors to seek higher returns by investing in riskier assets such as commodities and, in this case specifically, crude oil.

It can be argued that the printing of money by central banks inflated commodity prices beyond levels determined by supply and demand factors as investors looked for higher returns than what government securities provide. The European sovereign debt crisis and the uncertainty of the euro, though, increased the risk of investing in those commodities, and investors reacted by shifting funds to safe-haven assets such as U.S. government securities. The result has been a lowering of commodities prices, including oil, and lower diesel fuel prices at the pump (Chart B).

While lower diesel fuel prices are positive for the for-hire trucking industry, it is uncertain how long crude oil prices will remain at current levels, since the decrease is a result of changes in investor sentiment. If investors believe the European Union can contain the debt crisis, then investors will assume risks in the global economic environment have decreased and will shift funds to riskier assets, such as oil, in an attempt to seek higher returns. If investors feel the debt crisis has the potential to result in large disruptions to the global economy, then investors will seek safe haven assets in spite of lower returns.

Investor sentiment has had a large influence on crude oil prices. Crude prices will remain volatile for as long as central banks continue to print money to provide liquidity to a fragile financial system. The volatility in crude prices comes from changes in investor sentiment, which has overwhelmed supply and demand factors.

Volatility in crude oil prices implies volatile diesel fuel prices as well, so fleets should not adopt strategies to limit the upside risk of higher diesel fuel prices as this strategy limits the benefits when diesel fuel prices decrease.

These are not normal times. The central banks in the U.S., U.K., European Union and Japan print money, which distorts investment strategies and limits the effects of supply and demand factors on crude oil prices. Changes in investor sentiment will play a large role in crude oil prices for the foreseeable future. This implies diesel fuel prices will remain volatile for the foreseeable future.

In conclusion, investor sentiment has had a large influence on crude oil prices and will continue to do so for the foreseeable future. Carriers must be prepared to deal with volatile diesel fuel prices, and that will continue be the norm as crude oil prices change in response to changes in investor sentiment.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish