Slow economy may temper fuel price hikes

Nov 16, 2012
by DTN

Thanksgiving to Valentine’s Day ranks as the normal seasonal low for diesel fuel prices and the best fuel buying opportunity of the year, based on five-year averages. But before you dive into year-end purchases, consider 2012-13 has been anything but average.

Abnormally low stocks of diesel fuel in the U.S. would suggest a tight winter season that would move prices higher during the coming months. However, slow economic growth may temper price increases, according to experts.

Harry Cooney, manager of customer risk management for the energy division of GROWMARK, said that stocks of diesel fuel in the U.S. are lower than normal due to an increase in exports of diesel. That surge in exports is tied to the weak U.S. dollar, which tends to cause more exports of U.S. energy products, he explained.

Other factors in the lowered stocks are a comeback in over-the-road trucking in some areas, growth in railroads, and the fact that the U.S. is exporting a lot of diesel fuel.

Brian Milne, energy editor and product manager for Telvent DTN, said that supplies of diesel fuel right now are down 17 percent from a year ago and are much lower than the five-year average.

Although supplies are tight, demand for diesel fuel this year has been weak because of slow economic growth. In fact, data from the Department of Energy show demand last week was down 4.5 percent from last year, Milne said.

“The majority of U.S. diesel is used in the commercial industry setting, so there is a close correlation between economic growth pace and diesel demand,” Milne said. “Because there has been limited economic growth, diesel demand has been sluggish.”

Cooney commented that demand for diesel fuel is tied to a certain extent to action in the stock market.

“When the stock market is up, that is an indicator of a strong economy. And when there is a strong economy, diesel demand goes up,” he said.

No disruption from Sandy

Heating oil futures contracts are what are used as a price benchmark for heating oil, diesel fuel and jet fuel, Milne said.

“The expectation was that contracts would move sharply higher as we started this heating season, but right now, we are watching contracts sell off hard,” Milne said. “The reason has everything to do with Hurricane Sandy.”

Milne explained that about 80 percent of U.S. demand for heating oil is in the northeast U.S. Hurricane Sandy and the subsequent nor’easter caused widespread power outages, and demand for oil heat was lost. That caused heating oil contracts to trade below $3 per gallon for the first time since early August, Milne said.

Milne said he did not expect a large disruption in diesel supplies because of Hurricane Sandy. Although several East Coast refineries were either shut down or operating at reduced levels because of power and flooding issues, most of the U.S. refining is located in the Gulf Coast.

Once the effects of the storms are over, diesel prices may move higher during winter, since diesel fuel prices are linked with heating oil futures contracts, Milne said.

Although diesel prices tend to weaken from late October/early November into the December/January time period, this year may prove to be an exception to that rule.

“Prices may not dip as much in that time period because stocks are so tight in the U.S.,” Cooney said. “I think prices will dip, I just don’t know how much, given the situation.”

Cooney and Milne both said producers may want to contract at least 30 percent to 50 percent of their 2013 needs covered in that December/January time period since prices tend to rally from late February into spring.

Diesel costs soar

Fuel costs for irrigated farmers like Tim Lowery and his wife Deb of Davenport, NE, about doubled this year because of excessive heat and drought conditions. Compounding the drought, Lowery paid between $3.35 and $3.55 per gallon for diesel fuel for the 2012 crop, about 20 percent more than Midwest corn farmers averaged a year earlier. Overall irrigation costs for Lowery’s diesel-powered wells ran between $97 and $107 per acre while costs for the wells running on natural gas were between $28 and $30.

Lowery absorbed those higher expenses on his 1,060 mostly irrigated acres of corn and soybeans. But he did pass the higher fuel costs on to his customers for custom harvesting, raising his prices between 15 percent and 20 percent to cover both fuel and higher costs for equipment and repairs.

More than price, it’s availability of supply that worries Lowery. He’ll likely contract part of his fuel needs by year-end, then purchase on an as-needed basis.

Likewise, Joel Abeln, who farms 6,500 acres near New Cambria, MO, in the northcentral part of the state with his dad and brother-in-law, was able to pass on the higher expense by raising rates $10 an hour on the family’s excavating company service this year.

The farm operation is another matter.

Other than cash contracting a few months in advance, buying bulk and asking for competitive bids, fuel costs are tough for individual farmers to manage.

“We have to utilize diesel in our farming operation,” he said. “But unless you [are big enough] to use some kind of contract methods like futures or options, there’s really no way to control costs.” — Cheryl Anderson, DTN