Diesel Fuel Prices, Time to Take a Hedge

It’s been said that what goes around comes around. Well, it may not be karma, but today diesel fuel prices sure look like they are coming around to lower levels. This week the DOE reported that the National Price for trucking’s most used fuel had fallen to $3.888 a gallon. There is still a several week lag in retail prices compared as compared to current wholesale prices. Simply put, anyone selling fleet fueling right now is making better margins today than they were two months ago. With the truck stops, retail stations and card locks trying to make as much as they can in profits right now, I would expect the retail margin to continue to drop down, but at a much slower rate.

Let’s take that out of your fuel management system right now and look at something other than straight fuel savings. Fuel managers or CFOs might call it a hedge. Others might refer to it as fuel insurance. As part of your fleet management solutions, I don’t care what it’s called. The reality is that you want to protect your company against increasing diesel fuel prices. For some trucking companies, the increase hits as a fuel surcharge, while private fleets typically can’t pass on a fuel surcharge so they need to be creative in a legal way.

Crude oil prices and diesel fuel prices rise and fall at basically equal levels for most people. For illustration purposes let’s talk about these fluctuations as they relate to crude oil. Clearly, if you are going to hedge for diesel fuel prices you are probably going to want to do that against heating oil since there is no contract to trade on diesel fuel. Over the last 10 months you can call it. We have watched crude oil trade at $78 a barrel in October, $91 a barrel in December, $84 a barrel in February, and $113 a barrel in late April. Currently at the end of June a barrel is priced at less than $93. Nationally, we were paying $3.00 a gallon for diesel fuel in October. Our fleet fuel cards have been burning ever since at $3.24 a gallon in December, $3.51 a gallon in February and $4.12 in May.

With all the global happenings including debt ceiling, financial turmoil in Greece, economic gloom and the hurricane season fast approaching, ask yourself if now is the time take your cards off the table and hedge your fuel cost for the next year at current rates. Or, should you wait a few more weeks and see if the prices get lower? Most people believe that $80 a barrel or $85 a barrel is a real number that could happen. Of course you never know what kinds of surprises can happen on the way down. Maybe Saudi Arabia becomes mad at the United States for releasing fuel from the strategic reserve when the Saudis said they would make sure there was plenty of crude oil to lower prices. Or, perhaps the spare capacity that the Saudis say they have isn’t really the number. What if it’s lower? And, what if more bad economic numbers come out and the crude oil prices go into the $70’s?

We could play this guessing game about where fuel prices will go all day long. Why do I think some companies should consider buying some fuel insurance? (I think it sounds better than the word hedge) Well, when the market is tight with supply like it is now, you should consider locking in some of your fleet fueling cost now. That way you can sleep a little better tomorrow. There is more certainty that prices will go up to $130, rather than drop down to $50 a barrel. So, until next time, keep your eyes on your fuel management program or hire someone that will.

 

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