The futility of diesel price forecasting

The futility of diesel price forecasting

When it comes to predicting fuel prices, analysts are slicing their forecasts paper thin these days — into very short-term, short-term and longer-term sections

When it comes to predicting fuel prices, analysts are slicing their forecasts paper thin these days — into very short-term, short-term and longer-term sections. Stack them all together and it looks like trucking will see diesel prices peak in late spring or mid-summer, drop slightly before autumn and then end the year high but below peak, only to begin another climb to new levels over the long term. And that’s a for-sure maybe if ever there was one.

In April, for example, the U.S. Energy Information Administration (EIA) released its “Short-Term Energy and Summer Fuels Outlook.” According to the forecast, “Diesel fuel prices, which averaged $2.98/gal. last year, are projected to average $4.09 this summer [between April 1 and Sept. 30]. Weekly and daily national average prices can differ significantly from monthly and seasonal averages, and there are also significant differences across regions, with monthly average prices in some areas exceeding the national average price by $0.25/gal. or more.”

This week, diesel prices are up 2 cents to $4.10/gal. California remains the highest region at $4.44/gal., up 4 cents from a week ago and $1.21 from a year ago. The Gulf Coast region is the cheapest at $4.03/gal. Just two month’ ago, the average national price for diesel was $3.57 and was as low as $3.33/gal. at the start of the year.

EIA expects that the retail price for regular gasoline will average $3.86/gal. during the summer driving season. The annual average will be slightly lower at $3.70 for 2011, increasing to $3.80/gal. in 2012, it said. The organization, however, also noted that “current market prices of futures and options contracts for gasoline suggest a 33% probability that the national monthly average retail price for regular gasoline could exceed $4/gal. during July 2011.”

While there is relatively broad agreement on the general price trend for fuel (up, down slightly and then up again) analysts differ on the particulars of cost and timing and on which factors are actually propelling the price of fuel along its roller-coaster route. Tom Kloza, director, editorial content for OPIS (Oil Price Information Service), said that he expects the price of fuel to peak as soon as this spring at $4.10 to $4.25 for diesel and between $3.75 and $4 for regular gasoline.

“I do think we are going to peak soon,” he told Fleet Owner. “We will move a little higher on the excessive side, but I think this year is front-loaded.”

In a recent blog posting (, Kloza offered the odds of his forecasts being accurate. “The odds of average gasoline prices surpassing $3.75/gal. are very favorable,” he noted. “The odds of seeing a $4/gal. national average are probably just under 50-50, and the chances of surpassing the all-time peak of $4.11/gal. witnessed on July 17, 2008 are probably about 40%.”

Professor Andrew Thomas, author and contributing editor for Industry Week, is keeping a watchful eye on the value of the U.S. dollar, currently weak relative to other major currencies, as an indicator of fuel prices. “My take is that the dollar has been in decline in relationship to other currencies over the past few years so the price of oil has been going up [as a result],” said Thomas. Accordingly, he expects to see oil prices rise in the near term, drop in a year, but go higher over the next five years.

Thomas offers an example by way of explanation: “A low dollar generally benefits the oil importer and costs the exporter,” he said. “If South Korea, for instance, decides to buy oil from Brazil, then it converts its currency to U.S. dollars for the purchase since oil is valued in U.S. dollars. That gives them more purchasing power. Brazil has to do the same, converting its currency for the sale. In Brazil’s case, that reduces the profit when the money is converted back to Brazilian currency, so the price per barrel [in U.S. dollars] goes up to help compensate. Hence, the price per barrel of oil goes up overall.

“The price of oil is going to continue to be tied to value of the U.S. dollar,” he told Fleet Owner. “And in the long term, the dollar will come back. I always bet on America. It may take a long time, but we’ll fix it.”

Kloza is likewise focusing on money as the primary driver of oil prices, but his eye is on the flow of speculative and investment dollars. “Moammar Quadafi, violence in other MENA [Middle East North Africa] countries and the metrics of supply and demand all have exerted a limited impact on oil prices these days,” he noted in a recent blog posting. “The much greater driver has been money flow and the velocity with which money has cascaded (largely unfettered) into most commodities, and particularly into WTI [West Texas Intermediate oil] and Brent crude oil futures.

“…Speculative and investment interests have increased their bets on a higher price outcome for crude (they’re long) to where there is about $40 billion to $50 billion more money from funds that is on the buy side of the market…,” Kloza added. “This is not something sinister or collusive; it reflects the prevalent wisdom among money managers that oil and many other natural resource futures’ contracts can only move higher in the months and years ahead.”

TAGS: News
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