January was another great month for fleets as diesel fuel prices fell sharply again. The average retail price reported by the U.S. Energy Information Administration dropped by 41 cents compared to December. This was the largest decline since prices started falling back in March 2014 and, arguably, it was a bit overdue.
As we pointed out in our newsletter last month, diesel fuel retail prices have not fallen at the same pace as wholesale prices over the past couple months. In fact, retail margins have almost tripled to unprecedented levels while suppliers took advantage of the rapid decline in wholesale prices. Essentially, they kept some of the savings for themselves. While January prices continued to fall, suppliers continued to enjoy the profits derived from inflated margins.
So how much longer can these inflated margins last?
Nobody can say for sure, but there are some indications that the extended decline in crude oil and wholesale prices may be nearing an end. Supply and demand market forces will find a balance and it will likely be driven by less production in the near term. Some reductions in supply will result from shutting down oil wells that can no longer operate profitably. In addition, labor disputes and planned maintenance may curtail output by refineries.
If the market stabilizes and the there are no unforeseen political or weather crises that cause a spike in oil prices, it should put some downward pressure on retail margins. Assuming inflated margins are just a blip on the radar and cannot be sustained, retail prices will decline further so the margin spread begins to normalize at historical levels. It may take a few months, but should ultimately be good news for retail fuel buyers. If some major event occurs that causes prices to spike sooner, it will be bad news for everyone. Suppliers will have to give up their high margins quickly and they will need to continue raising prices just to maintain their historical margins.
In the meantime, now is the time to take a close look at your fuel purchasing program. For example, do you have pricing deals in place to avoid inflated margins? Do you have a process to audit the prices you are being charged? The potential savings are significant based on the current market and, more importantly, establishing these best practices will help protect you during volatile times. If you don’t have the tools or the time to focus on fuel; one of the largest expenses your company probably incurs, don’t be complacent because prices are lower than they’ve been in a long time. Get in touch with the experts at Sokolis Group to be sure you’re prepared for whatever the future brings.