Fuel Prices Unlikely to Climb

Diesel prices have edged up for two straight weeks but are unlikely to climb much higher in the near future before being pulled back down by oversupply.

Snowstorms in the Midwest and Northeast brought historic low temperatures in some places and forced oil prices higher. But the weather, albeit chillier than last year, hasn’t been below freezing long enough to make much difference, and there is still too much crude oil, natural gas and heating oil to allow prices to climb.

"In terms of world oil prices, we have been at the lowest levels, if you adjust for inflation, since the Great Depression," said Ron Planting, an analyst with the American Petroleum Institute.

This is good news to the trucking industry, which is seeing record low diesel prices. The national average diesel price crept up .3 cents last week to 97 cents a gallon, according to the Energy Information Administration. That figure is still 14 cents below its year-ago level.

Wholesale diesel prices fell 10.5% on the week — down 31% from last year — and the February futures heating oil contract dropped 9.8% in the same period. In the oil market, the February contract for West Texas Intermediate crude, a common market benchmark, closed down 2 cents at $12.13 a barrel last week, a further indication of suppressed prices, according to reports.

Other factors are likely to encourage the ongoing oversupply of crude oil. The International Energy Agency, which monitors world oil supply and demand, reduced its forecast for global oil demand in 1999. In its Monthly Oil Market Report for January, the Paris-based IEA predicted world demand for oil would grow only 1.1 million barrels daily, or 1.5%. The group had estimated a 2% increase in demand for this year.

In addition, the potential for increased production and supply from Iraq could complicate the oil market even further and prolong oversupply. The United States has proposed ending restrictions on how much crude Iraq can sell under the "Oil for Food" exemption, put in place by the United Nations after the Persian Gulf War in 1991.

Although a senior Iraqi minister was quoted by the Dow Jones News Service as saying the country would boost production by 500,000 barrels by March, many in the industry don’t think it is possible. Currently, The United Nations allows Iraq to sell $5.25 billion worth of oil every six months. But Iraq’s oil industry is in such bad shape that the country can barely produce $3 billion. Spare parts started reaching Iraq two weeks ago, and the country has boosted exports by as much as 300,000 barrels daily in the last three weeks.

Despite recent cold weather snaps, Mr. Planting said he doesn’t expect effects on the market from weather fluctuations to last long.

"Historically, weather has been for short periods and has had short-term effects on demand," he said. "I think the bigger picture is, what is the supply capability worldwide for crude and where is the demand going?"

The short-term weather forecast calls for warmer than usual weather for the next couple of weeks. The warm temperatures should prompt even higher distillate stocks and decreased demand. Diesel and heating oil are likely to feel the greatest downward pressure on prices.

For the full story, see the Jan. 25 print edition of Transport Topics. Subscribe today.