ANALYSIS: Turn the page and see what's on tap for diesel prices

By David Tanner, Land Line associate editor | 9/17/2012

On the shelf among the books that will never be written, right next to “Twenty Yards to the Outhouse” by Willie Makit (illustrated by Betty Wont), is an elusive title that claims to predict the long-term future for crude oil and diesel prices.

“It would be written by Mike Keester, because these things are always pulled out of your keester,” says Tom Kloza.

Kloza is an analyst with the Oil Price Information Service, and he’s been a go-to guy for us and our readers as we try to wrap our heads around energy trends and price fluctuations. Last year, Kloza told Land Line that figuring out the price of diesel was as much witchcraft as it was math and science.

On Monday, as on-highway diesel prices chugged past $4.15 on a 10-week bender, Kloza was putting the finishing touches on a presentation – a very real working title – that he planned to call “Pop Goes the Diesel.”

He says not to get fooled by the first chapter – a likely and predictable end-of-summer price lull – because the formula seems to be teeing up some fireworks for later.

“(Diesel) is the product that has the chance of seeing the most apocalyptic increases,” Kloza said.

While no outlook is perfect, the signs are telltale, he says.

The part of the barrel that diesel comes from, known as distillate, is in lower supply than last year, 19 percent lower in fact.

Home heating oil also comes from distillate. Therefore, if the U.S. has a cold winder and demand for heating oil goes up, and if trucking experiences a strong season hauling for the holidays, boosting diesel demand, it’s inevitable that prices will spike.

“We are entering into these precarious months with low inventories,” says Kloza. And unless there’s a massive conspiracy – his words – to understate inventories and inflate prices, the U.S. is likely headed for significantly higher diesel prices in 60-90 days.

Oil production, which plays a role in how much distillate becomes available, is another chapter that’s difficult to write, he adds.

“I wish I knew what was going to happen to the price of crude, and if I did know, I would be probably figuring out what to do with my seventh home in Monaco, or maybe I’d be looking to see if I could catch pictures of Kate Middleton on the deck of her yacht, or whatever. I’m not sure which.”

A little more predictable is the U.S. Energy Information Administration’s “Short Term Energy Outlook,” the federal government’s monthly publication that illustrates happenings here and around the globe.

In the September edition of “Outlook,” EIA analysts added 12 cents to the August prediction for what diesel prices could average for calendar year 2012. Their prediction translates to $3.96, up from $3.84 a gallon in August.

Predictions from the EIA tend to play things a bit safer than private-sector analysts – a bit more reaction and less crystal ball.

Still, the agency has put it out there that the 2013 average for diesel could be $3.73 next year.

Kloza says it’s tough to put a spin on it that far out. In his analysis, he tends to stick with the next few months than get caught up in predicting things a year from now – although he is frequently asked to.

If his theory holds up, and the U.S. has a cold winter, truckers could see prices of $4.50 to $4.70 at the pumps in many regions – and the dreaded $5 would not be unheard of under certain conditions “in some markets” where prices already tend to be higher.

“If it gets really cold in the Northeast,” he said.

Trusted as the author is, it remains his opinion.

Read more from the Oil Price Information Service here, and check out the September issue of the EIA’s “Short Term Energy Outlook” here.

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