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Diesel fuel pricing: Look to the futures

Feb. 4, 2011
Fleets yet again are being hit with rising diesel fuel prices. In fact, an Ernst & Young report prepared quarterly suggests that demand for crude oil is only going to continue to rise this year, albeit at a slightly slower rate than it did in 2010

Fleets yet again are being hit with rising diesel fuel prices. In fact, an Ernst & Young report prepared quarterly suggests that demand for crude oil is only going to continue to rise this year, albeit at a slightly slower rate than it did in 2010. But experts urge fleet owners to keep tabs on futures markets for crude prices to gain a sense of future diesel prices.

“Spare production and new refining capacity should be ample to absorb short-term demand growth,” Marcela Donadio, Americas oil and gas leader for Ernst & Young LLP, wrote. “However, U.S. policymakers and energy producers should remain focused on long-term issues and work together to create policies that encourage domestic resource production, in addition to conservation and the development of alternative energy sources, in order to prevent future demand-induced price spikes.”

According to Ernst &Young, oil saw its largest spike in world demand since 2004 in the fourth quarter of 2010.

“While demand is anticipated to continue growing as the market improves, the rate of increase is not likely to be as dramatic as year-end 2010,” the report noted. “Unknowns, including economic improvement in Europe and demand from China and India, will significantly impact the demand picture.”

With demand up, so too are prices. A gallon of diesel has climbed steadily, up to nearly $3.50/gal. at the end of January, some 60 cents more than a year ago. The price has been on a slow and steady climb since reaching a low point of $2/gal. in March 2009.

According to the latest Short-Term Energy Outlook from the Energy Information Administration (EIA), on-highway diesel fuel retail prices, which averaged $2.99/gal in 2010, will average $3.40/gal this year and $3.52/gal in 2012. Why this is happening is attributed primarily to higher crude oil prices,. However, EIA said that higher gasoline and distillate refining margins are also expected to contribute to the higher prices.

A barrel of crude oil is forecast to cost about $93 this year, $14 higher than in 2010. EIA is predicting, based on a projection of U.S. gross domestic product growth of 2.2% in 2011 and 2.9% in 2012, the cost to increase further in 2012, up to $99/barrel.

Bob Costello, chief economist for the American Trucking Assns. (ATA), offered a bit of advice for fleets as they try to gauge their future fuel costs.

“They can look at the futures of home [No. 2] heating oil,” he told Fleet Owner. “If the price is higher currently than [the futures price], than the [the traders] think the price will fall.”

A gallon of home heating oil, which Costello said is the closest comparison to diesel fuel, is selling on the September futures market for $2.82, only pennies different than the March price of $2.78.

“When [Americans] start using more heating oil, we typically see upward pressure on [diesel fuel prices],” Costello said.

Costello did caution that no method is fool-proof in predicting prices, but that there is a general feeling that diesel prices will not climb much higher in the coming months.

EIA points out that if OPEC does not increase production as expected (the organization’s next scheduled meeting is in June), then prices could rise much quicker than forecast. On the other hand, expected declines in oil production by non-OPEC countries is predicted to spur OPEC nations to continue pumping more oil to meet demand.

Economic recovery, both here and abroad, also factor into the price equation.

All factors being equal, EIA believes world oil consumption will grow by 1.4-million barrels per day this year and 1.6 million in 2012. That is on top of 2.2-million barrels a day of growth seen in 2010-- more than offsetting losses from the previous two years and surpassing the 2007 production output of 86.3 million barrels per day.

Crude oil futures also are not indicating a significant increase in future prices for gasoline, heating oil, or diesel. The March crude futures are trading for just above $91 a barrel as of the beginning of February. The September futures contracts are selling for about $98/barrel. Thursday morning, a barrel of crude was trading for just over $90.

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