Following the historic collapse near the end of April, oil prices began rebounding throughout May.  May’s prices started slightly under $19/barrel and nearly doubled by the end of the month closing over $35/barrel.  The following graph shows the daily price movements over the past three months:

The historic negative price dive in April was caused by a lack of liquidity in the futures markets when traders fled their positions as rising inventory levels threatened to exceed storage capacity.  During May, those storage concerns subsided as some countries, along with many states in the US, began to loosen their COVID-19 restrictions.  As businesses reopened and travel began to increase, global demand for oil and fuel began to grow.  With increasing demand and inventory levels receding, prices began rising.

The recent production cuts by Saudi Arabia, Russia, and other OPEC+ countries were another factor contributing to rising prices in May.  US oil producers also scaled back their operations.  These cumulative production cuts combined with the increase in demand provided solid support for oil prices in May.

Although oil prices rebounded sharply when looking at the overall overage for May versus April, diesel wholesale prices were surprisingly flat while gas increased significantly.  The growth in demand for gas was much more significant than diesel as individuals began to venture out of their homes again.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

As the graphs above show, retail prices for diesel showed a slight decline in May while gas retail prices were flat.  Despite the underlying increases in oil and wholesale costs, retailers absorbed those increases by sacrificing extraordinarily high margins they had been generating over the past couple months. Even though margins declined, they remained at a very high level for diesel.  Gas margins declined significantly to a level modestly above their typical range.  The following graph shows the retail margins over the trailing 15 months: 

As the summer months unfold and COVID-19 restrictions continue to be eased, Sokolis Group believes oil prices will remain in the $30’s per barrel with some potential to break into the $40’s if demand continues to rebound quickly.  However, the possibility also exists that oil producers could begin to increase production as prices rise which may partially offset any increases.  In addition, if a significant resurgence of the virus emerges and restrictions are tightened, the potential still exists for oil prices to fall back into the $20’s or lower.

As part of the sharp decline that began in January, oil prices set another somber record in April when they crashed below zero for a short period during the month.  Prices started the month at $20/barrel and managed to claw their way back to $19 by the end of the month despite the historic dip in negative territory.  April’s ending price is 70% below the start of this year along with the same time last year.  The following graph shows the daily price movements over the past three months:

COVID-19 continues to be the primary force driving prices down.  Global travel restrictions and lockdowns have significantly reduced economic activity and the demand for oil.  The decrease in demand across the globe has been estimated at roughly 30 million barrels per day, almost a third of pre-virus daily consumption. 

Looking closer at the historic negative dive in April, this event was caused by a lack of liquidity in the futures markets.  Oil is traded in option contracts that expire each month.  During the third week of April, options for the month of May were approaching their expiration date.  If option holders held their contracts to the end, they would have been obligated to take delivery of the oil.  The problem was that oil storage had become very limited as inventories grew from weak demand.  Traders were faced with the dilemma of taking delivery of oil with no place to store it.  They decided to pay someone else to take the option off their hands to solve the storage problem causing the option price to go negative.

Another notable item for April was that Saudi Arabia, Russia, and other OPEC+ countries agreed to scale back their oil production in an effort toward balancing the market.  Their cuts only amounted to about 10 million barrels per day which was far short of the decline in demand.  Oil prices barely responded to their action.  Production in the US also declined as a result of market forces.  With prices so low, many domestic wells became unprofitable to continue operating.  

Due to the continued decline in April, along with the sharp negative spike, the overall average price for oil was almost half of March’s average.  Substantial declines also continued for diesel and gas.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

While refined fuels declined, they did not get anywhere close to sub-zero like oil and should not be expected to do so in the future.  Refiners have cut back their utilization rates to a level around 70% compared to a more typical 90% as they adjust their throughput for lower fuel demand.  Even at the diminished output, they will still sell fuel at positive prices and generate crack spread margins, with diesel providing higher returns compared to gas.  Because they are refining less fuel, they are drawing less oil which is why storage has become very limited causing the negative option trades described earlier.

The retail price decline in April continued at a slower pace than wholesale.  Retail margins, already at unprecedented levels, rose even further in April.  As noted in the past, it is common for margins to increase during periods of rapid wholesale price declines when retailers take advantage of the opportunity to maximize their margins.  However, under these circumstances, it is important to recognize that retailers are pumping far fewer gallons and need higher margins to cover their overhead.  The following graph shows the retail margins over the trailing 15 months: 

Due to the market changes in April, almost all fleets should have seen a significant drop in fuel prices compared to March.  Fleets with diesel deals tied to wholesale cost indexes would have seen a larger decline at a faster rate compared to fleets purchasing at retail.

Looking out over the next couple months, parts of the world have begun easing their COVID-19 restrictions including many states in the US.  Sokolis Group believes that oil prices will remain at their relatively low levels through the summer until demand increases significantly.  If inventory storage remains tight while demand is low, the possibility exists for oil prices to drop quickly in late May when the next set of option contracts expire.  This would then be followed by a rebound like what happened in April.  For diesel and gas prices, as economic activity begins to strengthen, demand for fuel should grow.  Prices should stabilize and then start moving upward.

The sharp decline for oil prices that began in January has accelerated through March.  Prices declined by about 60% during March, falling to roughly $20/barrel.  They are now just under a third of the level where they started this year along with where they were a year ago.  The following graph shows the daily price movements over the past three months:

For some additional perspective on this remarkable decline, the following graph shows the daily price movements over the past five years:

From the graph above, prices have reached the lowest they’ve been since the start of 2016.  They are also at one of the lowest points they’ve been since the 1998 financial crisis.  Most notable is the rate of decline which may be the fastest in oil’s modern history.

The rapid decline is primarily attributable to the growing cases of COVID-19 throughout the world which have severely curtailed economic activity and the demand for oil.  Prices have also been driven downward by the battle for market share between Saudi Arabia and Russia.  Their disagreement about reducing oil production to try and balance the market led to Saudi Arabia’s decision to increase production during this unprecedented period of demand destruction. 

Due to the accelerated decline during March, the overall average price for oil fell significantly compared to February.  Substantial declines also occurred for refined products.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

For refined fuels, the decline in retail prices was at a slower pace than wholesale.  As a result, retail margins rose to unprecedented levels.  The growth in retail margins is typically seen during periods of rapidly falling wholesale prices as retailers take advantage of the opportunity to increase their profits.  However, under these circumstances, higher margins may be a necessity for some smaller retailers to survive as they pump fewer gallons.  The following graph shows the retail margins over the trailing 15 months: 

For most fleets, fuel prices should drop more than 30 cents per gallon compared to where they were just a couple months ago.  Fleets with diesel deals tied to wholesale cost indexes should see a larger decline at a faster rate compared to fleets purchasing at retail.  Declines for gas will be even larger because demand has been much lighter than diesel.  In addition, the typical increase in gas demand during the summer will be less likely if the public is still reluctant to travel.

As the impact of the virus continues to grow, Sokolis Group believes that oil prices will remain at their very low levels for the foreseeable future.  The market currently has too much supply from overproducing as overall demand has collapsed.  Excess oil and fuel inventories are now challenging storage capacity and refineries are beginning to scale back production.  However, it will still take some time for inventories to adjust unless there are any sudden changes with demand growth or OPEC+ changes its course. 

With so much inventory available, Sokolis Group is not aware of any fuel supply concerns in the US.  In addition, truck stop networks have remained open for fueling with very few exceptions.  The truck stops have limited their dining options, but showers and restrooms remain available and cleaning procedures have been enhanced.

For bulk and mobile fuel suppliers, we have seen a few changes regarding pricing structures due to driver labor challenges.  However, the most notable change has been related to paperwork like delivery tickets and BOLs.  Many suppliers are transitioning to electronic records to avoid any in-person transfer of physical paperwork.  In most cases, this is going well, but some customers still need to find a workaround for requiring a company representative to sign paperwork. 

The world is grappling with an issue of enormous scale and human impact, and our thoughts go out to all who have been affected by the outbreak of the coronavirus.  In addition to the obvious health concerns, there are significant financial concerns as many businesses struggle to survive and workers endure layoffs. 

The team here at Sokolis Group recognizes how challenging this period is and feels very fortunate to have the opportunity to continue providing fuel management services to our clients.  Our clients’ fleets and drivers are critical to distributing the goods and services necessary during this time.  We are here and ready to do whatever we can to support them.

During 2019, months before the virus emerged, we had already made the decision to move toward a virtual office environment.  By the end of 2019, our team was fully acclimated to working remotely every day.  In hindsight during this difficult time, we were fortunate to have already completed the transition. We recognize many companies are now just learning how to manage a remote workforce.

The key to our ability to maintain continuity of service is based on using cloud technology that allows us to support our clients and stay connected as a team.  Please continue to contact us via phone and email as usual.  We’re here for you. 

We will continue to monitor the fuel market for any changes and send out any additional updates if necessary.  In the meantime, should you have any questions, please feel free to reach out to your primary contact at Sokolis Group.

Oil prices began to show some potential to recover in early February following their sharp drop in January.  However, by the middle of the month, another sharp decline occurred with prices closing February just under $45 per barrel.  Oil prices have now fallen almost 27% since the beginning of the year and are about 22% lower than the same time last year.  The following graph shows the daily price movements over the past three months:

The rapid decline which started during the second half of January was caused by the Coronavirus outbreak.  As February began, optimism towards containment of the virus stabilized prices and they moved upwards.  However, by mid-February, new cases of the virus appeared in parts of the world that were not previously impacted, including a few cases with no clear connection to explain how it spread.  Fear grew about the contagiousness of the virus resulting in a reduction of global travel and economic activity.  As a result, prices dropped rapidly along with financial markets around the world.

Due to the significant decline during February, the overall average price for oil fell even further compared to January.  Significant declines also occurred for refined products.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

For refined fuels, retail prices did not show much change during the previous month but did start to fall in February.  The decline for diesel lagged wholesale while gas was quicker to catch up.  The result was that retail margins for diesel continued to increase to a very high level while gas margins declined toward a more typical range.  The following graph shows the retail margins over the trailing 15 months: 

Future oil prices will continue to be heavily dependent on developments with the Coronavirus.  As the spread of the virus appears to be widening, future global economic activity and the demand for oil will continue to decline.  Sokolis Group believes oil prices will likely remain in the $40 -$50 range for the foreseeable future until the spread of the virus declines.  Although OPEC+ is considering further reductions to their supply output to keep prices from declining much further, it may not be enough to offset the large reduction in demand caused by the spread of the virus.

If you’re concerned about the impact of future fuel price changes for your fleet and want to know if you’re receiving the best fuel prices possible, contact Conor Proud at Sokolis Group, cproud@sokolisgroup.com or 267-482-6159.  We are the nation’s leading independent fuel management consulting team and can help you make sure that your fuel management program is running at peak efficiency. 

Oil prices dropped sharply and unexpectedly in two stages during January.  Prices declined by 16% from the start of the year to close January just above $51 per barrel.  The following graph shows the daily price movements over the past three months:

The dramatic decline in January followed a tense period in December with rising oil prices.  Near the end of 2019, the US and Iran appeared to be moving toward a major military confrontation following the US’ assassination of one of Iran’s top military generals.  2020 began with anticipation that Iran would retaliate against the US leading to a potential all-out war in the Middle East.  However, Iran’s actual retaliation in early January was significantly less than expected, providing an opportunity for both sides to scale back tensions.  Oil prices reacted to the decreased risk of supply disruptions by falling rapidly during the first half of January.

Shortly after prices began to settle at a lower level during the middle of January, the next rapid decline began.  The cause of this decline was highly unusual; the Coronavirus outbreak originating in China.  The number of cases of the virus, along with the death toll, continued to increase in China during January.  In addition, outbreaks in other countries started to emerge.  Significant travel restrictions were implemented in China during a major holiday travel period, while other parts of the world also started to limit travel to contain the spread of the virus.  Oil prices, along with other financial market indexes, fell rapidly as future economic activity and demand for oil were anticipated to be much lower due to these limitations.

As a result of the rapid decline throughout January, the overall average price for oil fell compared to December.  Wholesale prices for refined products also fell while retail prices remained flat.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

For the refined fuels, retail prices barely moved which is typical during periods of rapid wholesale declines.  The result was that retail margins increased, particularly for diesel.  The following graph shows the retail margins over the trailing 15 months: 

Any prediction for where oil prices may go over the next few months depends heavily on progress to contain the Coronavirus.  Sokolis Group believes oil prices will likely remain in the low-$50’s with the potential to fall into the high-$40’s for a short period.  This assumes there are no other significant developments that negatively impact supply and cause prices to spike.  When new cases of the virus appear to have peaked, and optimism returns regarding travel and economic activity, oil prices should begin to recover their losses.  Increasing oil prices would typically not be a welcome change for fleets, but in this unique situation, it would be a positive sign from a humanitarian perspective.

If you’re concerned about the impact of future fuel price changes for your fleet and want to know if you’re receiving the best fuel prices possible, contact Conor Proud at Sokolis Group, cproud@sokolisgroup.com or 267-482-6159.  We are the nation’s leading independent fuel management consulting team and can help you make sure that your fuel management program is running at peak efficiency. 

Oil prices continued climbing higher throughout December, gaining over 10% to close the month and year at $61 per barrel.  Over the past year, oil increased by more than 33%.  The following graph shows the daily price movements over the past three months:

During December, two primary factors caused oil prices to move higher.  The first, during early December, was a surprise announcement from OPEC regarding their agreement to make deeper cuts in production.  The second, near the middle of the month, was an announcement that the US and China had reached a phase-one agreement toward resolving their trade war.  The anticipated supply reductions by OPEC combined with the renewed optimism toward global trade activity drove prices above the $60 mark.  The last time prices reached $60 was briefly during mid-September following an attack on Saudi Arabia’s oil production facilities.

Although December’s overall average price for oil increased compared to November, prices for refined fuels did not follow.  One of the main reasons fuel prices did not move up was because refining margins, commonly measured as the “crack spread,” declined which is typical during this time of year.  The 3:2:1 crack spread is based on producing two barrels of gas along with one barrel of diesel for every three barrels of oil.  The following graph shows the spread over the trailing 15 months:

Since diesel demand is typically strong during the colder months of the year, prices barely changed as the higher oil prices were offset by the lower crack spread.  However, gas prices declined modestly due to the combination of the reduced spread and slower demand during the colder months of the year.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

For both refined fuels, wholesale and retail prices moved similarly.  As a result, margins were relatively unchanged and continued to run at their typical levels.  The following graph shows the margins for over the trailing 15 months: 

As we begin 2020, Sokolis Group anticipates oil prices will continue to trade in the low- to mid-$60’s with greater potential to increase rather than fall back towards the $50’s.  Political and military conflicts are always a wildcard that can cause prices to spike at any time.  As we ended last year, air strikes were conducted by the US in Iraq and Syria.  These were followed by protesters storming the US embassy in Iraq as the US blamed Iran for stoking the tensions.  And most recently, a US drone strike killed one of Iran’s most senior military leaders as he traveled in Iraq.  Iran has vowed military retaliation.  As the tensions continue to rapidly rise in the Middle East, the risk of fuel supply disruptions also increases and may drive prices higher.

Additional supporting factors for rising prices include OPEC’s deeper production cuts, although the impact remains to be seen, particularly with compliance levels.  Also, continued progress toward unwinding the US-China trade war is anticipated to take place as the phase-one agreement is scheduled to be signed mid-January.  Finally, we should begin to see the true impact of the IMO 2020 maritime fuel transition which went into effect on January 1^st and is expected to increase the demand for oil and diesel fuel. 

If you’re concerned about the impact of future fuel price changes for your fleet and want to know if you’re receiving the best fuel prices possible, contact Conor Proud at Sokolis Group, cproud@sokolisgroup.com or 267-482-6159.  We are the nation’s leading independent fuel management consulting team and can help you make sure that your fuel management program is running at peak efficiency. 

Oil prices slowly climbed higher throughout November but gave back most of their gains at the end of the month.  Prices opened the month near $54 and closed just over $55 per barrel.  The following graph shows the daily price movements over the past three months:

There were no significant developments in November that drove prices gradually higher.  The main reason was attributable to cautious optimism that the US and China would reach a Phase 1 agreement toward resolving their trade war.  However, prices sank at the very end of the month as President Trump signed a bill supporting pro-democracy demonstrators in Hong Kong in defiance to China’s threats of retaliation.  Oil traders worried that any resolution to the continuing trade war would become less likely than previously anticipated.  As a result, the outlook turned pessimistic for future economic growth and demand for oil.

Despite the decline in prices at the very end of the month, November’s overall average price for oil increased slightly compared to October.  Average wholesale and retail prices for diesel also increased slightly as demand remained strong.  Meanwhile, gas wholesale and retail prices declined slightly as demand slowed.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Since retail and wholesale prices for diesel and gas moved in sync, margins were relatively unchanged.  For both fuels, retail margins continue to run at their typical levels.  The following graph shows the margins for over the trailing 15 months: 

As we wind down 2019 and look forward the start of 2020, Sokolis Group anticipates oil prices will continue to trade in the mid-$50’s with the potential to move toward $60 or more per barrel.  The biggest drag on any price increases continues to be the US-China trade war.  Mid-December will bring a significant indication of any progress as additional tariffs are scheduled to go into effect but could be called off.  Oil prices will be very sensitive to this decision. 

In addition, OPEC and Russia will meet in December to discuss the possibility of making deeper production cuts to support higher prices.  It is likely they will not take any further action until 2020 is underway but a surprise move to lower production would likely cause prices to increase.  Another factor that has not fully impacted prices yet is the IMO 2020 maritime fuel transition which takes effect on January 1^st.  Demand for oil and diesel fuel is expected to increase from IMO 2020 while demand for heating oil (essentially diesel fuel) will be increasing during the colder months.

If you’re concerned about the impact of future fuel price changes for your fleet and want to know if you’re receiving the best fuel prices possible, contact Conor Proud at Sokolis Group, cproud@sokolisgroup.com or 267-482-6159.  We are the nation’s leading independent fuel management consulting team and can help you make sure that your fuel management program is running at peak efficiency. 

SOKOLIS GROUP WINTER FUEL TIPS

• Replace fuel filters at manufacturer recommended intervals.  Particles in the filter make it easier for wax to gel.  Use the highest OEM accepted micron filter possible.
• Keep your fuel tanks full and free of water.  Cold air on top of warm fuel creates condensation.  This can be reduced by limiting the amount of space in your tanks.
• Test any bulk tanks for water.  Water freezes faster than the wax in the fuel.  If your fuel has 100 ppm or higher water content, it should be treated with a drying agent.
• Drain fuel water separators weekly and be sure to monitor them even between scheduled maintenance.
• Open the drain at the bottom of the fuel tanks to drain off any water &/or sediment.
• If your vehicle is going to be idle for long periods of time (4 hours or more) you may want to install a fuel heater or find heated parking.  Moving liquid takes longer to freeze than stationary liquids.  Keep your fuel moving or keep it warm.
• Tighten all fuel tank mountings and brackets. At the same time, check the seal in the fuel tank cap, the breather hole in the cap, and the condition of the flexible fuel lines.  Repair or replace the parts, as necessary.
• After your vehicle has been off the road for an extended period, start and let the engine idle for 30 or more minutes allowing warm fuel to return to the fuel tanks to break up any wax buildup.

DEF (Diesel Exhaust Fluid) and cold weather

• DEF is required to remain pure to operate correctly.  Additives should never be added to DEF.
• DEF freezes at 12 degrees F.  The 32.5% urea concentration in DEF allows both the urea and water to thaw at the same rate, therefore keeping the solution from being diluted or over concentrated.
• SCR systems are designed to provide heating to the supply tanks and lines during normal operation.  If the DEF freezes when the vehicle is idle, normal start-up and operation will not be inhibited.  The DEF will thaw as the vehicle is operated.  Freezing and thawing will not degrade the product.

If you need additional help or suggestions on your winter fuel program, please contact Conor Proud at 267-482-6159 or cproud@sokolisgroup.com.  For further help with your fuel management program or to lower your fuel cost, visit us at www.SokolisGroup.com.

Oil prices traded in a very narrow range during most of October following a short period of significant volatility during September.  October’s prices opened and closed the month at just over $54 per barrel.  The following graph shows the daily price movements over the past three months:

September’s volatility was caused by an attack on Saudi Arabia’s oil refining facilities during the middle of the month.  Prices spiked immediately following the attack.  However, concerns about supply disruptions in the Middle East quickly abated when it became clear that a retaliatory military response would not occur.  The refinery that was attacked was also able to resume limited production in a relatively short time. 

As tensions lowered, prices declined through the last half of September and remained in the low $50’s for most of October.  There were few developments in October to impact prices until the last week of the month.  During that time, prices showed modest growth as OPEC indicated it would consider the possibility of making deeper productions cuts to help support higher prices.  In addition, US oil inventory levels declined unexpectedly after an extended period of increases.  The bump in prices lost momentum as the unresolved US-China trade war continued to limit optimism about future global economic activity and its related demand for oil.

Due to the way prices declined during the last half of September while remaining lower through October, overall average prices for oil decreased slightly.  Despite the decline, average wholesale and retail prices for diesel increased slightly as demand remained strong.  Meanwhile, gas wholesale prices were flat while retail prices increased.  The increase in the gas retail average was primarily influenced by supply disruptions on the West Coast as several refineries dealt with maintenance issues.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:  

Since retail and wholesale prices for diesel moved in sync, margins were relatively unchanged.  For gas, retail margins increased modestly as retailers found opportunities to increase their prices slightly while wholesale prices remain flat.  For both fuels, retail margins continue to be at more typical levels although gas margins are on the higher end of their usual range.  The following graph shows the margins for over the trailing 15 months: 

Looking toward the remainder of the year through the start of 2020, Sokolis Group continues to anticipate that oil prices will climb back to $60 or more per barrel.  As we have previously noted, there are multiple factors that support rising prices even before considering the possibility of future conflicts in the Middle East.  Prices could be driven higher as oil inventories have recently shown a declining trend while OPEC and Russia are considering deeper production cuts.  In addition, the deadline for the IMO 2020 maritime fuel transition is approaching which is anticipated to increase demand for oil and diesel fuel. 

It’s also important to consider that even if oil prices do not increase significantly over the next few months, wholesale and retail prices for refined fuels could still increase, particularly for diesel.  The margin between the cost of oil versus the wholesale cost of refined fuels is commonly measured as the “crack spread.”  The 3:2:1 crack spread is based on producing two barrels of gas along with one barrel of diesel for every three barrels of oil.  The following graph shows the 3:2:1 trend over the trailing 15 months:

The trend shown above reflects some variation, but the spread has been running higher since the spring of this year.  Generally, the spread can be driven higher when demand for fuels increases while refining and distributing capacity is limited.  This can occur due to unexpected disruptions to refineries and distribution networks which often result from storms and fires as we have recently seen.  Planned disruptions also take place, such as during this time of year when refineries typically shut down for short periods to perform preventive maintenance tasks while also shifting production for winter blends of gasoline. 

As mentioned above, demand for diesel fuel is expected to increase from IMO 2020 while demand for heating oil (essentially diesel fuel) will be increasing during the colder months.  Therefore, in addition to our view that the underlying price of oil is likely to increase, we also believe greater demand for diesel will cause the crack spread to increase.  The result will be higher fuel prices for the foreseeable future.

If you’re concerned about the impact of future fuel price changes for your fleet and want to know if you’re receiving the best fuel prices possible, contact Conor Proud at Sokolis Group, cproud@sokolisgroup.com or 267-482-6159.  We are the nation’s leading independent fuel management consulting team and can help you make sure that your fuel management program is running at peak efficiency. 

September had a volatile period for oil prices following a relatively stable stretch for most of August.  The month opened with prices near $55 per barrel but sharply increased to over $62 during mid-September.  Shortly after the spike, prices quickly fell back to the mid-$50’s and remained in that range.  By the end of the month, prices closed just over $54, roughly where the month began.  The following graph shows the daily price movements over the past three months:

In early September, prices started climbing modestly as OPEC reaffirmed their production cuts through the end of the year.  Then, a rapid and significant increase in prices occurred during the middle of the month following a missile and drone attack on Saudi Arabia’s oil refining facilities, attributed to rising tensions with Iran.  Concerns about escalating military action in the Middle East in retaliation for the attack along with expectations of a major disruption to oil supplies caused the spike in prices.  The Saudi facilities had been producing approximately 5% of the world’s oil and initial estimates of the damage indicated it would take many months to restore full operations.  

Although it appeared that prices might continue climbing after the attack, they quickly began to decline when a military response did not occur despite continuing accusations of blaming Iran and high tensions in the region.  In addition, Saudi Arabia reported they were able to quickly restore a large amount of production capability and claimed that full operations would resume within weeks. 

As a result of the events in September, overall average prices for oil and wholesale fuels increased compared in August.  However, diesel retail prices remained flat while gas retail prices continued their slow decline that began in the spring.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:  

Since retail prices for diesel were relatively unchanged while wholesale prices increased, retail margins for diesel decreased.  Retail prices and margins for diesel had been relatively high over the past few months so the increase in wholesale prices was essentially absorbed at the retail level as merchants sacrificed their unusually high margins.  For gas, retail margins also decreased as average retail prices continued their slow decline while wholesale prices remained relatively stable.  For both fuels, retail margins have returned to more typical levels.  The following graph shows the margins for over the trailing 15 months: 

Looking toward the remainder of the year, Sokolis Group continues to anticipate that oil prices will climb back to $60 or more per barrel.  The ongoing tensions in the Middle East certainly create the possibility of even higher price spikes.  There have also been some reports doubting the Saudi’s ability to fully restore production as quickly as they have indicated which could tighten supplies as inventory levels decline. 

As we have previously noted, there are several additional factors that support rising prices; OPEC and Russia have extended their production cuts through the end of the year, and possibly into 2020, in their effort to tighten supply.  Plus, face-to-face negotiations toward resolving the US-China trade conflict are scheduled for October.  Lastly, the deadline for the IMO 2020 maritime fuel transition is approaching which is anticipated to increase demand for oil and diesel fuel. 

If you’re concerned about the impact of future fuel price changes for your fleet and want to know if you’re receiving the best fuel prices possible, contact Conor Proud at Sokolis Group, cproud@sokolisgroup.com or 267-482-6159.  We are the nation’s leading independent fuel management consulting team and can help you make sure that your fuel management program is running at peak efficiency.