Fuels Dip but Don’t Match Drop in Crude, Industry Experts Say

This story appears in the July 13 print edition of Transport Topics.

Diesel prices dipped slightly for the second week in a row but, according to truckers and analysts, have yet to reflect the full effect of falling crude oil prices, record diesel surpluses and one of the worst freight recessions in trucking history.

The average price of a gallon of diesel slipped only 1.4 cents in the Department of Energy’s latest weekly survey of filling stations.

The decline the previous week was even slighter at 0.8 cent. The national average price for diesel is now $2.594.

Even though demand for the fuel is the weakest in years, over a 14-week period in early spring diesel prices rose 60 cents — to $2.616 a gallon on June 22 when they had been as low as $2.017 in March.

“They’ve been high because of the money flow from Wall Street that has really propped up the price of crude,” said Tom Kloza, chief analyst at Oil Price Information Service.

Kloza and other analysts said investors began moving money into the oil markets in late spring when they believed they saw signs of recovery in the global economy.

“There’s nothing going on in terms of actual demand for oil that supports higher crude prices,” said Andrew Reed of Energy Security Analysis Inc. in Wakefield, Mass.

“What it is, it’s sentiment about what the economy is going to do,” Reed said, adding that as optimism about the economy has waned, so have crude prices.

As of July 9, crude had fallen back to $60.41 a barrel on the New York Mercantile Exchange after reaching $73 in early June.

The drop in crude also has sent the average price per gallon of gasoline sliding, to $2.612 last week from $2.642, the DOE said.

The good news, both analysts said, is that diesel prices should continue to drop as crude prices drop.

The bad news is that, despite severe economic downturns that raise surpluses, diesel prices are hostage to refinery, economic and market forces that go beyond demand, the analysts said.

The supply-demand fundamentals of the marketplace are exceedingly weak for diesel, as they have been for months, said Reed.

“In 2009, we’re talking about probably the U.S. producing on average 430,000 barrels a day more than we need” of distillate, Reed said.

In June and July, he said, the distillate surplus has been even higher, running 700,000 barrels a day because there is no demand for heating oil, which like diesel is made from distillate.

“We saw the lowest demand, really in a decade or more, for the diesel part of the refined product,” Kloza said.

Refiners are making as little as $5 profit on a barrel of diesel because the price of crude has been so high, Kloza said.

“Five dollars is probably not even a break-even margin,” Kloza said, “so the diesel that was the Albert Pujols of the season last year is . . . now kind of a slovenly middle-aged, dumpy guy. It’s just not performing.”

With the economy in a prolonged slump, however, trucking industry executives said fuel costs are starkly out of step with economic realities in the terminal.

“I just looked at some numbers the other day,” said Dan Coleman, founder and president of D.G. Coleman Inc., in Commerce City, Colo. “Year to date through May in our company . . . we were down 136,000 gallons [in fuel burned], so, I mean, that kind of tells you what tonnages are doing.”

Coleman’s firm, a truckload fleet of 100 that includes sleeper and day cabs, is a family enterprise that now includes two grandchildren.

American Trucking Associations’ tonnage index shows that, compared with last year, monthly tonnage totals are down roughly 10% a month as of May, so it is hard to explain the recent spike in diesel prices.

“Every person I talk to, I get a different answer,” Coleman said. “I think people are struggling to justify the price of the fuel because [a] year ago the oil companies were saying we need $4 a gallon to survive,” Coleman said. “One year later, we’re down in the $2.20s and the oil companies are still surviving and making huge profits.”

Coleman is located in one of the highest fuel cost areas of the country, the Rocky Mountain region, where diesel prices can run as much as 5 cents to 8 cents a gallon higher than the national average, he said.

Although lately the price spread has narrowed, the cost of diesel in the region has risen even as it declined nationwide.

In Houston, diesel prices often run slightly behind the national average but Brian Fielkow, president of Jetco Delivery, also was puzzled by pump prices that do not match the poor economy.

“Nobody’s seeing anything in the industry that would say that the demand picture is changing and, therefore, fuel is going up because all of a sudden trucks are all full,” Fielkow said.

He bought Jetco three years ago and can run his 90 trucks in 48 states, although he said the firm concentrates on building its regional presence.

One way to survive the mismatch between fuel prices and the slack economy, Fielkow said, is to educate freight customers and monitor prices closely.

“You’ve got to be watching them for yourself and your customers so that everybody knows it’s a fair equation, on the way up and down,” Fielkow said.