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Fleets Fearful of Future Fuel Prices

July 8, 2009

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While diesel and crude oil prices may have been stable lately, economists predict a spike is ahead, and some fleets may want to consider locking in current prices via fuel hedging. The Department of Energy's latest short-term energy forecast predicts prices will be higher next year, but price spikes could be a problem as speculators sway diesel prices as much as supply and demand, says the Oil Price Information Service.


"The recent rally in crude prices to over $70 was a reminder of just how fast energy prices can move," said Elaine Levin, instructor at OPIS's Fuel Management University. "Fleets can protect their fuel budget from a further increase by hedging. Many diesel buyers have opted to cap their fuel costs this year. The reason fleets like the cap is they are protected from rising fuel costs, but can benefit from lower prices if the market falls."

The DOE's Energy Information Administration says higher projected crude oil prices in 2010 ($12 per barrel higher on average) will mean higher diesel prices as well. At the end of June, average diesel prices were about $2.60, a number $2.037 below last year's price during the same period. The DOE's Energy Information Administration predicts the average price for 2009 and 2010 to land around $2.46 and $2.79 per gallon, respectively.

According to OPIS data, the average diesel spot price in the U.S. for June was $1.82 per gallon, 43 cents per gallon higher than the average six months ago. The organization attributes the rise to the spike in crude prices.

"Since March, the price of diesel has risen 56 cents per gallon, despite supplies being at a historical high and diesel demand at a nine-year low," notes Bill Graves, president and CEO of the American Trucking Associations. "It seems that more is at play than just the fundamentals of supply and demand."


While crude oil is expected to waver around $70 a barrel through the second half of 2009, this is still about $18 above the average for the first half, the Energy Information Administration says. The spot price should go back up slowly, averaging about $72 a barrel for 2010. According to the ATA, the price of crude has more than doubled since February, even in a time of low demand.

"Demand for petroleum products in the United States is lower today than it was 10 years ago and supply is higher today than it was in 1982," said Bob Costello, ATA vice president and chief economist.
"In addition, the International Energy Agency recently predicted that global demand for oil will drop by about 2.5 million b/d this year compared to last year-the sharpest year-over-year decline in nearly 30 years."



Globally, crude oil prices have been on the rise for four months in a row because of stronger economic activity, primarily in Asia, the EIA says. While the economic recovery hasn't kicked in quite yet, the anticipation of a recovery and predicted boost in oil demand seem to be driving the rising prices.

In the midst of a global recession, a price spike in diesel fuel could have serious consequences for the trucking industry, as fuel accounts for up to 25 percent of total operating expenses, OPIS says. To avoid spending the record $150.9 billion in diesel fuel, as the industry did last year, and keep prices where they are, fleets may start hedging their fuel purchases.



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