The U.S. average retail price of diesel dropped 4.6 cents to $3.161 a gallon, the U.S. Energy Information Administration reported Dec. 10, as crude oil prices dropped near $50 a barrel.
The drop in diesel marked the eighth consecutive weekly decline in the price of trucking’s main fuel. The price has fallen 23.3 cents during that period.
Yet diesel costs 25.1 cents a gallon more than it did a year ago, when the price was $2.910, EIA reported, a sign some analysts told Transport Topics that could mean higher diesel prices in 2019.
Average diesel prices fell in all regions of the country, led by the Gulf Coast, where per-gallon costs dropped 5.5 cents to $2.934 per gallon. The smallest drop was 1.5 cents a gallon in the New England region.
Gasoline dropped 3 cents a gallon to $2.421. Gasoline fell in all regions except the Midwest, where it rose 1.2 cents. The West Coast showed a 7 cent drop, marking the largest decline in any region.
Despite the dropping cost of a barrel of oil, some analysts said diesel users may not benefit quickly, and the relief could be short.
“Retail margins for fuel are very high,” said Howard Abrams, CFO of Sokolis Group, a Warrington, Pa.-based firm that advises fleets on fuel costs. “That’s keeping diesel rather elevated.”
Abrams told TT that sellers will delay lowering their prices, in a phenomenon known as “downward rigidity” or price “stickiness.”
It’s a way for retailers to briefly capitalize on higher prices while their wholesale costs do down.
“Retail merchants will drag their feet in lowering the prices,” Abrams said. “It’s a great opportunity for them to make a profit.”
It’s for that reason that Sokolis Group negotiates on behalf of fleets, aiming to get wholesale prices for diesel locked in for a time. Abrams said if his clients’ fleets are large enough, diesel suppliers will agree to contracts that can save them money. It’s the best way to save on diesel, Abrams said, and why his firm doesn’t get too involved in discussing aerodynamics and other efficiency methods with his fleet clients.
“The best easiest way to save and get more on your return on investment is just to pay less for it,” Abrams said.
It’s that hedging behavior that some feel is necessary, as diesel is still more expensive than it was a year ago. And the price of diesel is not likely to keep falling, said Phil Flynn, senior market analyst for the Price Futures Group of Chicago.
“It’s been darn volatile these last few weeks,” Flynn told TT.
West Texas Intermediary crude to be delivered in January traded just above $51 per barrel on Dec. 11 on the New York Mercantile Exchange. The day before, WTI flirted with the $50 mark.
But also on Dec. 11, Saudi Arabia said it plans to cut output to about 10.2 million barrels a day in January, down 900,000 a day from November, Bloomberg News reported. And Russian Energy Minister Alex Novak said that the country will reduce its output next month by at least 50,000 to 60,000 barrels a day. Those supply curbs come as Libya’s largest field is offline, according to Bloomberg News.
Flynn said another 300,000 barrels of oil per day could go missing if Canadian producers continue to have trouble with Alberta production fields.
Presently, U.S. inventories of oil and gasoline, based on five-year averages, are above average and prepared for a production slowdown, Flynn said. But distillate inventories used for diesel are about 5% below average, he said.
The regulatory environment could also shove diesel prices higher, Abrams said. The International Maritime Organization is pushing shipping vessels away from dirtier bunker fuel toward low-sulfur diesel. A new round of fuel regulations will hit in early 2020, and the shipping companies will begin buying more diesel in late 2019, Abrams said.
Flynn said more pressure on diesel prices will come with the home heating-oil season. Demand for home heating oil puts pressure on diesel supplies and production, he said.
And through 2019, pressure will come from the United States and global economies, which Flynn believes are not slowing down substantially.
“I think fears of a global economic slowdown have been overstated somewhat,” Flynn said.
But it’s the OPEC-and-Russia production cuts that have Flynn most concerned.
“It will leave (diesel buyers) behind the 8-ball later in the year,” Flynn said.