Hedging Your Fuel Future

Late summer's sharp declines in wholesale diesel prices are likely just short - term relief.

September 2008, - Editorial

by Deborah Whistler, Editor

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Without much fanfare, wholesale diesel prices have plunged by an average of more than 3.75 cents a gallon per business day from mid-July to late August, according to the Oil Price Information Service (OPIS).

OPIS said it documented drops in every U.S. bulk market, including an unprecedented decline of $1.07 a gallon on the West Coast.

But OPIS warns against too much optimism that diesel prices will continue fall or stay steady. Although the diesel drop outpaced the slump for crude, gasoline, and heating oil, there are worries that low historical inventories as well as a revival of foreign exports from U.S. ports could promote a strong rebound in prices during late 2008 or early 2009.

OPIS recently completed a synopsis of 25-year supply statistics as well as a look at some of the unprecedented summer pricing swings. Following are some insights from the study:

- As of August 22, wholesale diesel fuel prices plunged by as much as $1.07 a gallon in 50 days, only to bounce back by about 25 cents a gallon. The drop, and huge surge in volatility, has provoked some speculation by fleets and other end-users on whether now might be the best time to enact some late 2008-2009 hedges against another price spike.

- Peak prices so far in 2008 (and for the entire realm of transportation history) came in mid-July. Wholesale prices for ultra low-sulfur diesel (ULSD) moved above $4.10 a gallon in all major bulk markets, with Los Angeles CARB diesel commanding the highest numbers, at just over $4.15 a gallon. By late August, wholesale prices had dropped an average of more than 3.75 cents a gallon a business day, led by a $1.065 a gallon total decline in California.

- During that period, retail diesel prices matched only about half of the wholesale drop. In late August, nationwide pump price average stood at $4.34 a gallon, compared to the all-time high water mark set on July 17, when averages reached $4.845 a gallon.

- The diesel drop outpaced the slumping demand for crude, gasoline, and heating oil, but refiners still can make far more money by producing ULSD.

The OPIS analysis suggests that diesel inventories are quite low, given the dramatic gains in transportation diesel during the last few decades. OPIS looked at current total and regional inventory statistics for distillate (which represents mostly transportation diesel) and compared the numbers to 2005 and 1983 levels.

Most recent Energy Information Administration distillate inventory numbers, for example, record about 18.31 gallons of fuel per person nationwide. That's slightly below where inventories stood on this date in the watershed hurricane year of 2005, and it is down by about 5 gallons per person from inventory levels of 25 years ago.

Regionally, the Midwest appears most stressed from this historical perspective. New England is also a region to keep an eye on, OPIS says some of the storage is committed to heating oil, but there is only 15.33 gallons of product per person, or about half the reserve seen 25 years ago.

OPIS says the results of its analysis should prompt marketers, fleets, and other end-users to reconsider taking steps to guard against the next oil price spike. Helping fleets plan their diesel future including how to hedge a portion of fuel purchases will be the focus of this year's 14th Annual OPIS Fleet Fueling Conference & Exhibition. More than half of its 19 educational sessions will deal with how to leverage fuel volatility to your advantage, regardless of price swings, according to OPIS.

The conference is scheduled for September 21-23 at the Hyatt Regency, Atlanta, Ga. Following are a few of the topics to be covered:

- How UPS manages costs for its 6,700 vehicles.

- How one large Southwest transit system saves close to $1 million in fuel costs.

- How shippers are testing a new fuel payment method that puts them in charge of surcharges and how carriers can participate.

- How some carriers are beating the EIA index by 12 cents a gallon or more with new fueling strategies that peg over-the-road purchases to different fuel indexes.

- How Sherwin-Williams cost-saving strategies are keeping mpg down and morale up with its drivers.

- How some fleets hedge their fuel and pay a net 15 cents per gallon below their competitors. For more information go to:

E-mail Deb Whistler at [email protected], or write P.O. Box W, Newport Beach, CA 92658.

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