Diesel, Crude Prices Set Records

Two records in crude oil and diesel prices were recorded this week, and neither spell out good news for the trucking industry.

Crude prices in the New York Mercantile Exchange broke the $44/barrel threshold this week while the U.S. Energy Information Administration (EIA) said last week’s average diesel pump prices rose to $1.78/gallon. See Diesel Sets Record High at $1.78

According to various news sources, these are some recent supply concerns that have dogged traders recently:

  • On Tuesday the Organization of the Petroleum Exporting Countries (OPEC) announced that there was no “spare” oil capacity to ease prices
  • Saudi Arabia reportedly has some spare capacity but cannot immediately ramp up production
  • On Tuesday saboteurs blew up an oil pipeline that supplies Iraq’s main refinery
  • Uncertainty exists over the fate of Russian oil company Yukos

    According to EIA economist Jacob Bournazian, the recent record-setting spike in crude prices is consistent with a price trend that has developed over the past year.

    “The recent spike is reflecting a cyclical demand for oil in Europe, Asia, and the U.S.,” Bournazian said. “In an eight- to 10-week cycle, crude seems to have been going up $6 to $8 a barrel and then going down $4 to $5 a barrel. In the past 10 months it happened six times.”

    If that cycle continues, there will be a predictable relief in pump prices on the way. “I wouldn’t be surprised if this new peak drops to $38/barrel in early September. What’s causing this is strong world demand— that evidence is clear,” Bournazian said.

    Although OPEC has ramped up more oil production than ever in recent months, rising global demand continues to outstrip supply, Bournazian said. Recent political and security turbulence has also affected prices, but these factors play second fiddle to world demand, he added.

    “Terrorism is a variable I put in as a ‘minor factor’ category,” Bournazian said. “The major factor is strong demand outpacing supply. While these other events adds color to supply uncertainties, it’s when overall capacity is tight that market people pay attention to these political uncertainties much more. It contributes to an edgy market that certainly favors the sellers. If the strong [world] economies didn’t exist, buyers wouldn’t be paying these prices.”

    Diesel Price at Record High, Gasoline Declining

    On Monday EIA reported last week’s diesel pump prices set a record high, while gasoline prices actually posted a 1.7-cent decline to $1.888 per gallon— significantly cheaper than its record high of $2.064/gallon set on May 24, 2004.

    “It seems like a statistical blip, but the economics see diesel already in a stable pricing pattern— it’s moving according to any changes in crude,” Bournazian said. “With gasoline, the markets were not in balance. It’s recovering from price spikes experienced in May.”

    Because of the stability of the diesel market, the impacts on crude correlate with pump prices more readily. “Diesel immediately responded [to crude prices]. Gas may be falling in some regions but gasoline prices were already overpriced. Diesel prices had bottomed out since we’re off-demand for diesel right now,” Bournazian said.

    However, he also warned that prices for neither gasoline nor diesel are likely to drop in the short term, noting it takes between two to four weeks to see crude prices affect the retail level. “I think that’s the last of the price declines at the pump in light of these crude prices this week. I’d fill up now,” Bournazian said.

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