Weak demand will thwart increases, experts say
Following a major price spike in 2008, stable diesel fuel prices were welcome news for custom operators last year. Barring unforeseen developments, the trend is likely to continue through at least the first half of 2010, say market watchers.
Lackluster demand is the key factor holding prices in check, says Marty Wieland, director of energy risk management for Growmark, Inc., Bloomington, IL. He notes that the slowdown in the general economy has severely crimped over-the-road trucking, the prime driver of domestic diesel fuel prices.
“Right now there's not a lot of demand for diesel fuel, and for the spring, at least, there's plenty of inventory,” says Wieland. “And until we see demand come back, we probably won't see a significant price increase.”
Just when demand will strengthen is anybody's guess.
“Many economists are anticipating some improvement in the economy in the second half of the year,” he says. “As that comes about, we'll see diesel fuel prices start to bump up accordingly. You also need to keep in mind that it's a world market. Demand increases in other countries could also come into play.”
On the supply side, Wieland says there's always the potential that supply disruptions caused by unexpected events like late summer-fall hurricanes in the Gulf of Mexico or international political turmoil could create a price spike.
“But even then, there's currently plenty of excess capacity in U.S. refineries. Prices wouldn't necessarily shoot up all that quickly.”
Yet Dennis Weber, owner of Weber Oil in Kiel, WI, offers his customers forward contracting. He suggests that if you choose to contract, only lock in part of your annual fuel needs at the start of the season.
“You don't want to think of it as a home-run play where you buy 100% of what you're going to need for the season because you think you can outsmart the market on price,” says Weber. “Instead, buy a percentage of what you need — say up to 50% — to manage some of your risk.
“Then, if the price shoots up for some reason, you can take delivery of the gallons you bought at the forward-fixed price. If the price stays the same or goes down, you can keep buying at the daily spot price and use the forward-contracted supply up at the end of the season. It's like anything else; it usually doesn't pay to put all of your eggs in one basket.”
In its Short-Term Energy Outlook for February, the U.S. Department of Energy (DOE) projected retail diesel prices in the U.S. will average $2.95/gallon in 2010. That's up from $2.46 last year, but down from an average price of $3.80 in 2008. For 2011, DOE is projecting an average price of $3.16/gallon.