Diesel Dives 7¢ to $3.535

This story appears in the Dec. 15 print edition of Transport Topics.

The U.S. diesel average price dropped 7 cents last week, to $3.535 a gallon, and the Department of Energy said prices should fall below $3 next spring for the first time since 2010.

Diesel has plunged almost 40 cents since June and is down almost 50 cents since it topped out at $4.021 in March. It is also 34.4 cents less than a year earlier and is at the lowest level since February 2011.

The extended drop in retail prices and oil futures has DOE’s Energy Information Administration projecting the diesel average price will bottom out at $2.97 a gallon in April.

Trucking’s main fuel has not been that low since September 2010, according to DOE figures.

“We’re seeing a lot suggesting that diesel prices are going to be a lot lower than last winter,” EIA’s Sean Hill said. “Oil prices have fallen even more than we thought they would.”

For all of 2015, diesel will average $3.07 a gallon, 31 cents lower than EIA projected a month ago.

DOE also reported the retail regular gasoline price slid 9.9 cents to $2.679 last week, its lowest price since February 2010.

Gasoline, which has fallen more than $1 since topping out at $3.713 per gallon in April, was 59 cents below a year ago.

At the same time, crude oil fell to a five-year low of $59.95 a barrel Dec. 11. Crude futures have plunged more than $45 on the New York Mercantile Exchange since June.

“Lower prices are finally catching up with high oil production and supplies,” Hill told Transport Topics. Refiners’ distillate margins “are relatively healthy right now, and they’re going to run as much [diesel and heating oil] as they can.”

EIA’s outlook projected that gasoline will decline to an average $2.60 next year, with a low of $2.54 in March, and the agency lowered its crude oil forecast by $15, to $62.75 a barrel.

John Larkin of Stifel, Nicolaus & Co. said last week that, while lower fuel prices generally help trucking companies, larger carriers with more fuel-efficient trucks may make less money from their fuel surcharges as prices decline.

Lower prices “may actually work against those companies, which are made more than whole from their fuel surcharge programs,” he wrote in a Dec. 8 investors’ note.

“Large, publicly traded carriers generally have better fuel efficiency than the rest of the market, so they’re making a little bit of money off that,” said Brady Cox, a Stifel analyst who co-wrote the report.

Those fleets “get significantly better mileage than the rate assumed by shippers, which helps offset unbilled miles,” he said. But with prices — and surcharges — down, they are making less money from surcharges, Cox told TT.

“Shippers are looking at the entire market — and that’s what they base their surcharges on,” he said. “It’s probably not a big deal, but it’s not the positive scenario that everybody thinks.”

Less-than-truckload carriers could see similar drawbacks from contracts that were negotiated assuming stable fuel, which could leave base rates “insufficient to earn the expected margin,” Stifel’s note said.

“Most LTLs have gotten to the point where their networks are dense enough so they’re making money on the [surcharge] program, as well,” Cox said.

Parcel carriers such as UPS Inc. and FedEx Corp., which adjust their pricing monthly, can benefit more from fast-falling prices because of their surcharge lags, Stifel said.

“The faster fuel rises, the more near-term pain, and the faster fuel drops, the greater the near-term benefit” for those carriers, the report said.

Last winter, diesel — whose price often rises as it competes with heating oil for distillate stocks in cold-weather months — gained 17 cents in the three months ended in February to more than $4.

Distillate fuel inventories, which include diesel and heating oil, are in a “new normal range — a little lower than five years ago but about where they’ve been for the past few years,” Hill said.

And “because crude oil is so cheap, distillate inventories will continue to build this winter compared with the past couple of winters, even with more heating-oil demand,” he said.

Distillate supplies jumped 5.6 million barrels last week, DOE said in a separate report released Dec. 10. Gasoline and oil stockpiles also rose.