Diesel Declines 3.3¢ to $2.186; Gas Continues to Rise

This story appears in the Feb. 23 print edition of Transport Topics.

The average retail price of U.S. diesel declined for the fifth consecutive week, dipping another 3.3 cents a gallon, according to the Department of Energy.

The latest report showed that diesel had fallen to $2.186, continuing a recent pattern of trucking’s main fuel becoming cheaper while gasoline prices continued to rise. Last week, the average retail gasoline price climbed another 3.8 cents to $1.964, the highest price in three months, DOE said after its Feb. 16 survey of fueling stations.

Fuel prices are moving in opposite directions because of shifting demand patterns, said Energy Department analyst Tancred Lidderdale.

“Diesel consumption is still weak because of the economy, but over the last couple of months the consumption of gasoline may be stopping its slide,” he said, noting that in recent weeks gasoline usage has nearly matched the same period of 2008.

Diesel has moderated in the first seven weeks of 2009, dropping 10.5 cents a gallon and following the downward trajectory of crude oil prices that dipped below $35 a barrel last week. On the other hand, gasoline prices have climbed 28 cents.

In contrast, the retail prices of both fuels fell in unison during the final seven weeks of 2008, with diesel dropping 48.2 cents a gallon and gasoline falling 45.9 cents a gallon.

The latest price trends are being driven by changes in refining margins, Lidderdale said.

In December, refiners were losing 6 cents on each gallon of gasoline they refined, but they made up for it by making 50 cents a gallon refining oil into diesel, Lidderdale said. By early February, that margin for diesel was down to as little as 29 cents, while the gasoline margin was up to 36 cents a gallon.

Diesel now is 36% below the same week of last year, when it was $3.396. With the recent increases, the year-to-year fall in gasoline prices now is 35%.

Prices that truckers are seeing are likely to remain fairly steady, ac-cording to DOE, which predicted an average of $2.28 a gallon for all of 2009. Its most recent energy outlook continues to predict lower diesel demand in 2009.

“The price of diesel is still going to be driven by the price of crude oil later this year,” said Lidderdale, who said he expects the retail price will

increase slightly because of higher diesel refining margins.

If diesel prices continue to flatten out, it will be difficult for marginal fleets that were helped by lower prices in the fourth quarter to keep going, several executives said during the recent BB&T Transportation Services Conference. Diesel fell 40% from the beginning of the quarter to the end of the year, helping cash flow for those struggling fleets because fuel surcharge collections continued at a higher level.

“The price of fuel kept players in the game in the fourth quarter,” said Landstar System Inc. Chief Executive Officer Henry Gerkens, voicing a view shared by others. “That game ain’t going to last much longer,” he said.

Gerkens predicted that the recession will reduce industry capacity another 5% to 6% this year on top of a similar level of bankruptcy-related culling of capacity last year.

Many analysts agreed.

“Carriers are unlikely to continue to benefit from fuel tailwinds as 2009 develops,” said Stifel, Nicolaus & Co. analyst John Larkin in a Feb. 17 investor note.

Thom Albrecht of Stephens Inc. said in a note on the same date that the savings on an annualized basis of $40,000 per truck from lower fuel prices are being wiped out by the combination of less-efficient equipment utilization and lower freight rates.

Fleets at the meeting said they are continuing to embrace products such as bunk heaters, auxiliary power units and speed governors and are cracking down on excessive idling.

The industry’s efforts to conserve fuel have lowered consumption by an estimated 8% to 10% according to Mark Hazelwood, executive vice president of Pilot Travel Centers. For example, conservation steps are saving Werner Enterprises Inc. about 7 million gallons a year, a company official said.

Meanwhile, other sources, such as the Abraham Energy Report newsletter, believe prices will remain volatile because it will

be difficult to bring crude oil and fuel price markets into balance between supply and demand. That’s because of the uncertain effect of bloated inventories and production cuts by the OPEC cartel, the latest Abraham report said.