Diesel prices could go “much, much higher” beginning about 40 days from now, while gasoline prices will fall come November, according to Tom Kloza, a senior oil analyst for Oil Price Information Service (OPIS). Kloza offered a close-up look at the future of fuel prices in North America during a live webcast on August 17 called, “Managing fuel prices in a volatile market,” presented by Fleet Owner and sponsored by Zonar Systems.
“Diesel is where I am really worried,” Kloza said. “In Q4 of 2012 and Q1 of 2013, we could see much higher prices –as much as $50 per barrel above crude or around $4.00 per gallon wholesale. Retail prices could get close to the 2008 crazy period when they reached $4.75 or higher. I hate to say it…
“We may be in for a short price break from about Labor Day to Columbus Day,” he added, “which represents an opportunity. Then there is a real risk that the numbers will go much, much higher. [I am seeing] just about as compelling a case for a run-up in diesel prices as I have ever seen.”
Kloza outlined many reasons why it is likely that diesel prices will rise and gasoline will prices will fall. Ironically, one of the primary reasons is the amazing boom in oil production in the U.S. and Canada. While domestic oil production will be instrumental in the country’s efforts to achieve energy independence, the crude coming from oil shale in North Dakota, Pennsylvania, Texas and elsewhere is better suited to making gasoline than diesel.
“Most of our crude is super light and super sweet,” Kloza explained. “Our refineries were not really built to process it. [The upshot is that] refineries running it will make more gasoline than diesel. Some estimates are that they will produce ten percent to as much as seventeen percent less diesel.”
Right now, Kloza noted, the United States exports diesel, primarily to Central and South America. If domestic production swings toward gasoline, the U.S. may have to import diesel while exporting gasoline, for which there is less demand worldwide.
“The Chinese demand for gasoline is nowhere near the demand in the U.S.,” Kloza noted. “The demand that is growing is for diesel, not gasoline. Diesel has more BTUs, more energy. Diesel is the molecule every refiner in the world wants to focus on,” he said, “including here in North America.”
Demand for diesel is also brisk here, he added, including in the new oil fields, which are utilizing huge numbers of trucks and other diesel-powered equipment in fracking operations. Diesel fuel may also have to replace fuel oil in the northeast this winter because of fuel oil market conditions. It all adds up to higher diesel prices.
There are, of course, factors that could cancel a rise in diesel prices or even create a drop, Kloza noted. “Diesel is THE international bellwether product,” he explained. “As the economy goes, so too do global diesel price references. [The return of a recession in Europe or here could cause diesel prices to stabilize or fall.]”
While the smart bet is on diesel prices rising, gasoline prices are expected to drop, Kloza offered. The domestic gasoline market is different than the diesel market,” he told the audience. It has been “pretty violent” lately with a run-up in prices, but that is set to change come November.
From April to mid-September it is difficult to make summer blend gasoline without great expense, so gasoline prices go up, Kloza said. On September 15, the “recipe” for gasoline changes (everywhere but in California, which makes the expensive blend through mid-October) and it gets easier to make gasoline with less expensive ingredients both here and abroad.
“Gasoline prices should go sharply lower in Q4 of 2012 and Q1 of 2013,” Kloza said. “It has been a great summer for U.S. refiners. By November, there will be plenty of gasoline available, demand will be down and prices could be at $3.00 per gallon or a little less in some places.”
When it comes to advice for fleets, Kloza cautioned the audience to be very careful about hedging because it can be very dangerous. “If you are going to hedge, call me first,” he said, “and don’t tie your purchases to New York, tie to local indices. There are very drastic regional disparities in price. Also ignore the Wall Street fast speak.”
For fleets that want to hedge diesel, Kloza said, “Be ready to pull the trigger about Labor Day through Columbus Day. That would be the period to hold your nose and hedge.”
Gasoline prices, on the other hand, should be at their lowest from November 2012 to early January of 2013.
Kloza had plenty of good news when it comes to the energy future for North America. “I am here to tell you today that North America has become a much larger producer of oil than before. There has been nothing less than a revolution in oil production over the last two years or so,” he said. “By 2020 or a bit sooner, we will probably be independent of foreign crude, [except for a little from Saudi Arabia, which owns interests in our domestic oil production and perhaps some from Venezuela.]”
By the end of the decade, we will be producing about nine million barrels per day of oil just in the United States, Kloza predicted. Canada will be producing another four million barrels. “We will need a supply of about fifteen to sixteen million barrels a day by 2020 and we can do it,” he said.
Concerning natural gas, Kloza was also bullish. The case for natural gas is “absolutely compelling,” he noted, adding that what the North America pays for natural gas today “is a fraction of what they pay in Europe or Asia. It is one-fifth, one-sixth or even one-seventh less. This is a vast difference and it will impact North American businesses and, hopefully, economies in a positive way into the next decade.”
Tom Kloza’s complete, one-hour webcast, “Managing fuel prices in a volatile market,” is available for viewing online, free of charge.
OPIS is also hosting its 18th Annual Fleet Fueling Conference & Exposition September 30 to October 2 in Las Vegas. The conference will focus on best practices and strategies for fueling fleets smarter and more efficiently.