Fuel prices slip—but will stay high overall

Fuel prices slip—but will stay high overall

The recent dip in the price of diesel and gasoline is reflective of a modest pullback in oil prices due to falling demand. However, experts caution that much uncertainty remains in the global oil market, especially in terms of the ongoing civil war in Libya

The recent dip in the price of diesel and gasoline is reflective of a modest pullback in oil prices due to falling demand. However, experts caution that much uncertainty remains in the global oil market, especially in terms of the ongoing civil war in Libya. Therefore, fleets should not expect a significant decline in diesel prices for the rest of the year.

“The price of oil is down at the moment, yes, as well as the cost of gasoline and diesel in the U.S. But oil is still trading at over $100 per barrel and futures contracts [for oil] through December remain above that number,” Denton Cinquegrana, editor-- west coast spots for the Oil Price Information Service (OPIS), told Fleet Owner.

“What’s happened is that oil prices got ‘over cooked’ and that’s reduced demand,” he explained. “Diesel demand is also a pretty good indicator of economic activity, so as demand has declined, it indicates U.S. economic growth is either flattening out or slowing.”

According to the Energy Information Administration (EIA), the average price for gasoline in the U.S. fell over 5 cents from last week to $3.79 per gallon and is down 20 cents from the week of May 16. The agency noted the average cost of diesel in the U.S. is now $3.94 per gallon; a drop of just under 5 cents from last week-- but that represents a decline of 12 cents per gallon since the week of May 16.

OPIS’s Cinquegrana added that this is why the “cure” for high fuel prices is high fuel prices, as higher costs lead to less consumption and thus less demand.

Indeed, Jerome Horton, chairman of the California State Board of Equalization (BOE), said gasoline and diesel consumption flattened and declined, respectively, in February this year due to the rising cost of those fuels.

“As California gasoline consumption remained flat, higher gasoline prices have resulted in a greater percentage of household income going to gasoline,” said Horton. “Consumers will likely continue to look for ways to use less gasoline in response to the higher prices they are now facing compared to a year ago.”

In February, California’s diesel consumption totaled 176.5 million gallons – some 19.1 million gallons less than in February 2010, representing a decrease of 9.8%, according to data tracked by BOE.

The dip in oil prices is also in response to broader “macro-economic” factors, noted OPIS’s Cinquegrana, in particular the poor private-sector job creation numbers released by payroll management firm Automatic Data Processing (ADP) this week.

According to the latest ADP National Employment Report, private-sector employment only increased by 38,000 from April to May on a seasonally adjusted basis – far below economists’ predictions of 100,000 jobs.

ADP noted that employment in the goods-producing sector fell 10,000 following six months of increases, while manufacturing employment fell 9,000 in May following seven consecutive monthly gains.

“Although we continue to see jobs being added to the economy, this month’s job figures show that employers believe we are not out of the woods yet when it comes to decisions on hiring,” said Gary Butler, ADP’s president and CEO.

“A deceleration in employment, while disappointing, is not entirely surprising,” added to Joel Prakken, chairman of research firm Macroeconomic Advisers. “In the first quarter, GDP grew at only a 1.8% rate and only about 2.25% over the last four quarters. This is below most economists’ estimate of the economy’s potential growth rate and normally would be associated with very weak growth of employment.”

And it’s economic data like ADP’s employment report that can create significant volatility in oil prices – and thus gasoline and diesel costs – on top of traditional supply and demand factors, stressed OPIS’s Cinquegrana.

“You’ve got to understand that there are way more moving parts now in how oil prices are set compared to even three years ago,” he explained.

“Wall Street trading firms really have the most impact on daily movements in oil prices now,” Cinquegrana pointed out. “What OPEC [The Organization of Petroleum Exporting Countries] says or does still matters, but it matters a lot less than 20 years ago. And the big major companies – ExxonMobil, Shell, etc. – don’t control daily movements in oil prices at all, though they take all the blame.”

What he believes will be interesting to see moving forward is how oil prices react to bigger economic shifts, such as higher interest rates or Greece defaulting on its debt repayment obligations.

“Then you might see the dollar suddenly spike in value, maybe even reach parity with the Euro, and that would cause oil futures to plummet,” Cinquegrana noted. “Fleets must remember that oil prices – and the prices of the fuels refined from it – now react more and more to other economic trends than pure supply-and-demand factors.”

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