The past few months showed how fast diesel fuel prices can change. During most of 2014, fuel prices were not very volatile although they declined slowly. Then, at the end of November 2014, a rapid decline began which continued through February 2015 that shaved about 40% off of average wholesale prices and 25% from retail prices.
The swift change and wider spread between wholesale and retail prices provided an unprecedented opportunity for merchants to maximize their margins. That party is over for now. Most recently, wholesale prices abruptly increased by almost 20% squeezing margins and pressuring retail prices to start moving higher.
Despite the recent trend upward, it’s difficult to say where fuel prices will continue to go. There are a number of factors currently in play that could drive prices in either direction.
For example, prices could be driven down due to the following:
- The brutally cold winter temperatures should start to subside throughout the US which will reduce demand for heating oil, essentially the same product as diesel fuel.
- Scheduled maintenance at a number of refineries will be completed resulting in more refined product flowing into the market.
- US drilling production has remained strong. Despite the recent shutdown of many rigs, inventory levels have reached record levels. There is the potential to run out of storage capacity within the next couple months which will force product to be sold cheaper to keep it moving.
- There are indications that the US and Iran may reach a deal related to Iran’s nuclear program in the near future. If sanctions are lifted, the market will see more barrels of oil from Iran.
On the flip side, prices might be driven up by the following:
- Conflicts in the Middle East are unlikely to subside anytime soon and may be more likely to expand. Although the market seems to be accustomed to the ongoing battles, any substantial negative changes may cause prices to spike in anticipation of supply disruptions.
- US economic data continues to show improvement which may result in an overall increase in demand.
- The summer driving season will arrive soon which typically increases demand.
Any combination of these factors may be in the headlines on any given day. Volatile prices will probably be the result. As we’ve pointed out in our previous newsletters, volatility in prices provides retail merchants an excellent opportunity to maximize their margins. 2015 could be a good year for them. With the uncertainty ahead, how will 2015 impact your fuel program?
Do you have fuel purchasing deals in place to help protect you from paying inflated margins? Is it time to reevaluate how you purchase fuel to determine if there’s a better way? Are you considering hedging to reduce some risk of prices moving higher than you budgeted? Now is a great time to take a close look at your fuel program, identify areas for improvement and make your moves.
If you don’t have the time or knowledge to determine what changes may be needed, or you just want a fresh set of expert eyes to look things over, get in touch with us at Sokolis Group Fuel Management. We can perform a complimentary, no obligation review of your fuel program and let you know where there are opportunities to save money, improve your purchasing methodology and be prepared for whatever the future brings.