Fuel for thought
Forecasting diesel prices is no more an exact science than witchcraft is mathematics

By David Tanner, associate editor

A cold winter can always guarantee two things – birds will fly south, and diesel prices will fly north. The nasty winter we had was no exception, and even some of the most dedicated truckers were wishing they had wings instead of 18 wheels.

Everyone was ready for a spring thaw and the likelihood of falling prices to boot. Some experts believe some relief is on the way for those paying the fuel bills, while other factors indicate it won’t last long.

It’s as tough to predict fuel prices as it is the weather, says Tom Kloza, chief analyst for Oil Price Information Service.

“Any prediction that goes out beyond six months makes witchcraft look like mathematics,” he says.

As an example, prices in late 2010 were not forecast to be as high as they got. Kloza says a perfect storm began in the fall, fueled by China’s move to convert factories from coal-fired to liquid fuel.

Kloza predicts that the upward pressure is about to plateau.

“At least for the first half of the year, I think we’re going to be scraping some of the highs here shortly,” Kloza said.

“We’re much closer to the highs than what is going to represent the price for the year. The fear of some people is that we’re already this high (in February). ... Are we going to see $4-plus on diesel and $4 on gasoline? I think the answer is no.”

That could be welcome news for those paying the bills.

Glen Sokolis – founder of the Sokolis Group of fuel management and consulting company – has a similar take on prices for the middle part of this year, but believes the last part of 2011 will see a rebound.

“At the end of the day, worldwide demand is up, and overall that’s really what’s caused the price to spike,” Sokolis said.

“We’ll probably wind up seeing it retreat a little bit, but you never can tell. The cold weather both here and in Europe has not helped at all.”

Forecasting isn’t a perfect science because things that can drive markets change daily, if not weekly. Kloza’s “witchcraft” statement is part tongue-in-cheek, but it speaks to the uncertainty of it all.

The cold winter, China’s demand, an Alaskan oil pipeline leak, recent turmoil in Egypt and other oil producing countries, and even the BP oil spill in the Gulf of Mexico have all contributed in some way, analysts say, whether it is in the short-term or longer term.

Sokolis explains how the tough winter affected the short-term, as both diesel and home-heating oil fall into the same category – distillates – produced by refineries.

“At the end of the day, there are a couple of things that happen with home-heating oil. It’s more important that people stay warm than trucks get diesel fuel. I’m not arguing in favor or against that,” he said.

“If you’re a refiner or distributor, the markets for home-heating oil are much greater than the markets for diesel.”

Sokolis forecasts a short-term easing of prices through the summer, but the last part of the year is still a wildcard.

“I think we’ll be level for the next few months in the $3.50s or $3.40s range nationwide, and then I think we’ll see another jump of 15 to 20 cents back up towards the second half of the year,” Sokolis said.

In its February edition of Short-Term Energy Outlook, the U.S. Energy Information Administration predicts that diesel prices will average $3.43 for this calendar year. But in each of the past few outlooks, the EIA’s predictions have crept upward, demonstrating that fuel prices continue to be a moving target.

To keep up with happenings, many truckers follow the EIA’s weekly reports because many fuel surcharges used by trucking companies are based on EIA numbers.

Many truckers also use TruckMiles, a service of ProMiles, to track daily prices.

ProMiles Marketing Director Chris Lee says his company surveys approximately 5,000 to 5,500 truck stop fueling stations to compile daily reports. Reports are broken down by state and fuel-tax information.

Although he is not in the forecasting business, Lee has seen his share of trends. Global demand for oil and diesel has changed considerably in the past few years, he said.

“The thing that always amazes me is that the volatility that brings that price up rapidly seldom brings it down as rapidly as it brings it up,” Lee says.

“In the last two or three years, we’ve seen it go up as much as 10-15 cents in a week, but for it to go down more than 2 and-a-half or 3 cents in a week, it’s extremely rare.”

How high will it go?
The question truckers are asking is how high will diesel go?

Earlier this year, the former president of Shell Oil Company, John Hofmeister, told the media, including Land Line Now, that he sees $4 and even $5 diesel within two years. Hofmeister believes global demand is not going to let up anytime soon.

But analysts like Kloza are downplaying the price claims.

“Most of the predictions that tend to be sky-high are being made by people with agendas,” he said. “Those agendas could include that they’re riding crude oil higher, or riding some of the futures and options higher, or in the case of somebody that’s well-meaning like the former president of Shell, they’re trying to get attention to the fact that we don’t have much of an energy policy in the U.S.”

Economic recovery and exports are additional factors in price, Sokolis says. As the U.S. economy improves, so will freight and miles traveled.

“I think more things are going to be put on trucks and keep the economy moving because trucks are the core to our country, and I think that we’ll see a supply and demand and oil prices will be up around $100 a barrel,” he said.

Curb your enthusiasm
The Obama administration, like other administrations that came before, wants the U.S. to reduce dependence on foreign oil and oil in general to meet emissions goals.

As alternatives are introduced in an effort to create jobs and reduce emissions, the prices for petroleum products are sure to be affected.

“Like anything else on the market, it’s a supply-and-demand thing,” says Lee, adding that the U.S. imports more than half of its oil with the lion’s share of imports originating in OPEC nations.

“The higher the demand becomes, the higher the price is going to be for the raw material.” OPEC was planning to have a supply meeting as Land Line went to press.

Kloza says he equates the price of diesel this past winter to that of a trendy California wine.

“You’ve had kind of a sugar rush for the world economy after a very depressed period of time,” he said.

“When we get to May, traditionally the lowest demand month in the world, there’s going to be some cross-currents for some downdrafts in these high prices.”

But like the weather, there are no guarantees. LL