OPIS: Diesel markets may face wild future

| Thursday, July 18, 2002

Truckdrivers have seen relative diesel price stability in 2002, but that may soon change. Geopolitical factors, EPA regulations, and new trading dynamics may all conspire to push diesel fuel prices back into the turmoil that marked the first two years of the 21st century.

This possibility will be addressed at the 8th Annual Oil Price Information Service (OPIS) Fleet Fueling meeting and tradeshow at the MGM Grand in Las Vegas Aug. 18-20.

According to OPIS data, scarcely 12 cents per gallon has separated low and high diesel prices so far in 2002, and that's down from the wild 53-cent difference witnessed in 2001 and the 40-cent gallon range seen in 2000. But industry experts envision instability in the next nine months.

"You can easily make a case for a 20 cent-per-gallon surge or fall in fuel prices," said Tom Kloza, OPIS' chief oil analyst. "In fact, you can see elements conspiring to push some regional markets sharply higher, even as world prices fall."

Meanwhile, groups are again warning that new government mandates for low sulfur fuel specifications could create diesel price havoc. Similar predictions were made during the last decade only to see suppliers quickly adapt to new regulations, ultimately leading to accusations that industry had "cried wolf."

But this time, the "wolf may be at the door." For example, refinery consolidation had a different meaning in 2000-01 as medium-sized companies wanted to get bigger and big suppliers wanted to gain critical mass. Now, cost cutting is king and more than a dozen refineries face sale or closure by year's end because of slumping margins and high de-sulfurization expenses, OPIS says.

What's more, refiners won't be required to make the lower sulfur diesel until 2006, but the high cost of sweetening the spec for gasoline production, fending off foreign imports, and beginning the construction process for multimillion diesel desulfurization units could tighten supplies in some regions as early as this winter.

The American supply challenge, meanwhile, is offset by perhaps the most uncertain international picture since the Persian Gulf war. A weak dollar, lack of OPEC discipline, Venezuelan unrest, and drastic gyrations in global economies could all conspire to create unprecedented updrafts and downdrafts for world oil markets.

The difference between costs seen for purchases at the top or bottom of the market in 2000 and 2001 varied by more than 60 percent. Experts at next month's conference will detail why similar volatile diesel price swings may be ahead for the United States. For more information about the conference and show, visit www.opisnet.com/market/conferences/fleetweb/index.htm.

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