Trucks at Work
Fuel prices down … but for how long?

Fuel prices down … but for how long?

While we are always cautious about expressing too extreme a degree of pessimism, we don't see a lot on the fundamental horizon to encourage much optimism. The key fundamental drivers — entrenched high unemployment, consumer/business de-leveraging, fiscal austerity, and weak housing markets — are all long-term sources of weakness and we don't expect to see any material improvements in those areas any time soon.” –Brian Dolan, chief currency strategist,


If there’s any sort of silver lining to the stalling global economy and all the perils that condition currently presents for the future, it’s that oil and fuel prices are on the downswing – a happy occurrence, considering the high price projections experts bandied about just a few short months ago.

The issue, however, is whether such fuel price deflation is a longer term trend or a mere blip in the great scheme of things – a prelude before truckers face another long steady rise of prices at the pump.

For now, at least, both diesel and gasoline prices continue to fall. According to the Energy Information Administration (EIA), the average price for diesel fuel in the U.S. has declined from $3.83 per gallon during the week of Sept. 19 to $3.78 per gallon by Sept. 26 and then to $3.74 per gallon as of last week – a drop of four cents per gallon in the last week alone, and nearly 10 cent dive over the last three weeks. However, all that being said, diesel is still nearly 75 cents higher per gallon compared to a year ago at this time, the EIA noted.

Gasoline prices witnessed a far steeper drop, the agency said, going from a U.S. average of just over $3.60 per gallon to $3.51 per gallon on down to $3.43 per gallon as of last week – a drop of nearly 8 cents in the last week alone and a nearly 20 cent plunge over the last three weeks. Yet again, though, gasoline is still 70 cents per gallon higher in cost compared to what we were paying at the pump this time last year, EIA's data indicated.

Many analysts, however, think this fuel price decline is going to be temporary as oil producing nations are starting to ratchet back their oil production levels – cutting supplies in the face of falling demand.

For example, according to the most recent oil market survey conducted by research firm Platts, the Organization of the Petroleum Exporting Countries (OPEC) cut production by 130,000 barrels per day (b/d) down to 30 million b/d during September – the result of lower volumes from Saudi Arabia and sabotage-stricken Nigeria.


Those drops in Saudi and Nigerian output, along with other small dips in the United Arab Emirates, Kuwait and Iran, more than offset increases totaling 150,000 b/d from Angola, Libya and Iraq, Platts said.

Reduced use of crude in power generation was offered as one reason for the lower estimates of Saudi production, the firm noted.

However, given the recent downtrend in crude prices and expectations that Libyan production will ramp up, some participants in Platts survey suggested that Saudi Arabia's October output might see a further dip.

“The main factor to watch in the next few months is just how much Libyan crude comes back on the market, and whether other producers need to make way for it,” noted Platts’ John Kingston. “Long-term, there's one thing to note: there are a few examples of oil exporting countries that have gone through enormous change recently – Iran, Iraq, Nigeria and Venezuela – and had their production return to pre-turmoil levels. Libya would be challenging the odds to get back to its original 1.6-million-b/d production level.”

The firm added that oil prices have declined recently from the 2011 peaks seen in April, with Brent crude oil futures – the main measuring stick for the world’s oil markets – settling below $100 per barrel by the end of last week. This is the first time since February that oil prices dipped below the $100 mark, Platts added, as concerns about the global economy in general and the “Eurozone” area in particular cast a shadow over oil markets.

However, other experts are not so sure about how oil prices will behave in the coming months. Jay Maroo with the firm Energy Risk, said in a recent research note that, taking the average of the analysts' forecasts, Brent crude is expected to average $110.51 per barrel (bbl) this year, falling marginally to $109.85/bbl in 2012, with West Texas Intermediate (WTI) rising from $94.05/bbl this year to $97.70/bbl in 2012.

“These forecasts show an upward trend from 2010 prices, where both Brent and WTI averaged nearly $80/bbl,” he explained. “However, volatility has certainly not been ruled out. Analysts' forecasts for Brent outside their reference-case scenarios vary enormously from as low as $60/bbl to as high as $175/bbl depending on events.”


Maroo said most analysts believe a major driver of oil prices in the months to come will be the economic performance of the U.S. and Europe, followed by the speed of return of Libyan oil production. Some put more emphasis on Asia and others believe that Saudi Arabia's budget planning will be a supporting factor for oil prices.

While forecasts for global economic performance remain mixed, concerns over another recession have increased significantly in recent weeks and this has been keeping downward pressure on oil prices.

For example, Colin Smith, head of energy research at VTB Capital, believes that perceptions of economic recovery have been "scaled back quite sharply" in the past few weeks. However, he added that so-called “demand destruction” could also have happened simply because prices were high rather than due to recession.

In short, there are simply far too many economic unknowns at this point to get a clear picture of where oil prices – and thus diesel fuel costs – will go as we head into 2012. That certainly doesn’t help the trucking industry as it tries to figure out what the bottom line might look like in a year, but then again uncertainty – more often than not – seems to this industry’s lot these days.