Commentary by Glen Sokolis, Sokolis Group
It’s hard to believe that fuel prices are falling, especially if your local gas station has not yet crested the hill at the pump. In fact, most of us have yet to see this. This is because most retail locations are taking their time lowering their prices (and your costs).
But a couple days ago, in the smallish town where I live, the price for gas at a low-cost retail station was down to $3.93 a gallon. A half mile away it was $4.09 a gallon. A half mile in the other direction it was $4.19. Knowing the fuel market as well as I do, I recognize that even that low-cost retail station is making a nice margin. The others are knocking it out of the park, and that isn’t good for consumers. But keep watching: Prices will drop down near you soon. Trust me.
What is causing a dip in diesel fuel prices now, after prices went up 20 out of the past 22 weeks in a row? Why now? It is unusual for this time of year, as we approach summer when prices tend to be on the rise for both diesel and gasoline. The answer is complex.
As we look back for clues, remember that diesel fuel prices started their run of increases around Nov. 29, when national DOE prices were $3.16 and a barrel of crude was $81.65. That was about the same time many of the large brokerage houses came out saying that crude oil was going to go over $100 a barrel. Uncertainty creates fear, but by the time we got to Feb. 14, crude oil was still only at $83.66 a barrel. Diesel prices had climbed to $3.54 based on supply needs for heating oil in the Northeast and China’s continued increased consumption — an increase, sure, but nothing to lose sleep over. Then, all heck broke loose.
Fighting and political unrest in the Middle East scared investors, who in turn speculated that there would be interruptions in oil supply. They were somewhat right: Libya’s civil war created a relatively small supply issue, but fuel prices took off anyway. In mid February the price per barrel was $83.66, but by April 29 it was up to $113.39. During that same time, the U.S. dollar fell to its weakest point in history. Investors were betting that continued fighting in the Middle East would create oil supply issues in the beginning of the summer driving season, when demand usually increases. There was a lot of tension, speculation and fear.
Take a snapshot of today – it’s quite a different picture. By all accounts of market fundamentals, things look fine. The world’s largest oil producer, Saudi Arabia, has committed to pick up any lost supply from other countries and stated that crude oil prices should be in the range of $80 to $90 a barrel. You, me and every other car-driving American cut back on our gas purchases when they hit $4/gallon. The DOE shows 2.4 percent less gas being used this year than last year over the last four weeks. The U.S. dollar is getting stronger. Fighting continues in Libya, but the initial fears have gone away. We killed the world’s most wanted man. And speculators woke up.
The sell-off happened the first week of May, and now with new trading policies on speculators, we shouldn’t have crazy ups and downs, or at least not so many. All great news, I can hear you saying, but your real question is, how much will diesel drop? And when? It’ll be a few weeks yet, but it will happen. As a rough gauge: For every dollar crude oil goes down, diesel fuel prices and gas prices will go down between 2-3 cents per gallon.
Let’s not forget that Mr. Truckstop and Miss Retail Station have been taking it on the chin the last several months, so they are looking to hold onto some of that price margin right now. What goes up fast comes down slow. I would expect to see National DOE diesel fuel prices by July to be close to $3.75, maybe even less. It all depends on how long the retailers can hold that margin. Retail prices for gas should fall 35 cents over the next few weeks, but there will be retailers out there trying to hold onto every last penny. My advice is to be smart and shop well.
Glen Sokolis is president of Sokolis Group, a nationwide fuel management and fuel consulting company, www.FuelManagementSokolisGroup.com. You can reach him at gsokolis@sokolisgroup.com or (267) 482-6160.
Recent installments of “Friday Fuel:”
* Fear and Fleet Fueling Prices, 4/8/2011
* “Outsourcing Fuel Management,” 2/25/2011
* “Five W’s for Fleet Fuel Buying,” 2/18/2011
* “Rising Fuel Prices Mean You Need A Fleet Fueling Policy”, 1/28/2011
* “Are Fuel Prices Going To Break Your Budget?” 1/7/2011
* “Happy New Year, Diesel Fuel Prices!” 12/30/2010.
* “Why Diesel Fuel Prices Need Increased Taxes,” 12/3/2010
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