The U.S. Energy Information Administration's (EIA) September Short-Term Energy Outlook projects West Texas Intermediate crude oil will average $94.50 per barrel in 2012, virtually equivalent to 2011's average of $94.40. Due to stable crude oil prices, EIA projects diesel fuel prices will average $3.87/gal. in 2012, up slightly from the $3.85/gal. average expected this year.
Commercial Motor Vehicle Consulting (CMVC) does not place much confidence in EIA's price projections for crude oil and diesel fuel (Chart A) in 2012 since the projections are based upon supply-and-demand factors and exclude the influences of financial assets, exchange rates, stock and bond prices. Since the financial crisis started, crude oil and other commodities have become financial assets to trade just like stocks, bonds and currencies as financial institutions have diversified their asset portfolios.
The result is crude prices are more volatile than what is reflected by changes in supply and demand, particularly due to the fragile global financial system, which has resulted in large movements in the prices of financial assets. Increased volatility in crude oil prices has resulted in increased volatility in diesel fuel prices. With the euro in jeopardy, four central banks (U.S., U.K., Japan and European) printing money, risks of another recession in Western economies, and undercapitalized banks, the value of financial assets will remain volatile in the near term, implying continued volatility in crude oil and diesel fuel prices through 2012.
EIA implied gasoline and diesel fuel prices are being largely determined by the price of Brent crude oil rather than West Texas Intermediate crude oil (Chart B) as in the past. Historically, the price of West Texas crude oil was about the same as the price of Brent crude oil, excluding transportation costs, but increased oil production in the Dakotas and Canada has resulted in increased crude oil supplies in Cushing, OK.
Transportation bottlenecks are restricting the movement of crude oil to refineries on the coasts, so West Texas crude oil is selling at a discount compared to Brent crude oil, due to a set of different supply-and-demand factors. This transportation bottleneck will not be corrected in the short term as the U.S. needs to expand its pipeline network to transport increased supplies of crude oil from the Dakotas and Canada to refineries on the coast.
The price of gasoline and distillate fuels, such as diesel, are set by contracts in New York Harbor. These refineries are processing more imported oil than domestic oil supplies, so the price of Brent crude oil has a greater weight in determining gasoline and diesel fuel prices than West Texas crude oil.
At the moment CMVC believes it is very difficult to project the price of crude oil in 2012. The current fragile global financial environment implies crude oil prices will remain volatile, so fleets must develop strategies to limit the upside risks of increasing diesel fuel prices as well as develop strategies to reap the benefits of decreasing diesel fuel prices. In projecting the direction of diesel fuel prices, fleets should pay more attention to the price of Brent crude oil than West Texas crude oil.
Commercial Motor Vehicle Consulting publishes the monthly newsletter “Visibility of the Supply Chain” for general freight carriers. To order a copy, contact Chris Brady of CMVC at [email protected] or 516-869-5954.