Diesel price outlook higher

The diesel price forecast continues to move higher on Iranian concerns. Crude prices stabilized at a level over $108 but have recently dropped slightly below that level. Crude prices are at their highest levels since falling after the early 2011 surge in price. Pump prices in February were 12 cents higher versus January and 36 cents higher than last February – averaging $3.95. We expect the pricing pressures to continue for at least several months. If Iran actually goes through with their threat of fully closing the Strait of Hormuz prices would quickly skyrocket – possibly topping the record set back in 2008. We still believe that the actual time that the strait would be out of commission would be relatively minor, but the damage would already have been done by the world’s commodity traders. We look for the Iran situation to have an effect on the market for the next 4-6 months.

Outlook
Our fuel price outlook moved higher once more, with most of the impact occurring in the late summer months. While crude prices are the primary driver of fuel price volatility, refinery activity and our oil supply chain system also have impacts. Refinery activity in the Northeast is set to have a significant reduction later this year. Prices started the year off relatively weak but continue to move higher at a strong pace. Our forecast for the middle of the year is higher than last month with the Q3 average increasing 8 cents to $4.26. This is also when we expect to see pricing pressures peak, with a slow pull back at the end of 2012 and into early 2013. Prior to the last couple of months we had been showing prices stabilizing at right around $4 throughout the year. Unless something more drastic happens (see above) we don’t expect the price of diesel to spike significantly above this level, but weekly variations are hard to predict.

Year-over-year gains decelerated for the 3^rd straight month, up just 10.3% in February. The year-over-year impact will continue to lessen for the next few months as we finish overlapping the run up in pricing from early 2011. With prices dropping last year starting in May and our outlook for pricing gains during that time we expect to see reasonable strength in year-over-year gains during the summer months. Look for gains to max out near 10% unless there is a dramatic surge in crude prices.

Both volatile and stable
Pump prices have the knack of being quite volatile: whether it’s because of weather or crude oil prices or supply concerns or one of a hundred other reasons. We are seeing that take shape right now.

Supply and demand fundamentals don’t point to strong growth in oil pricing until late 2012 – once global demand has had time to heat back up. The recent improvements in economic data, if accelerated, could move that to mid-2012. We continue to point out the obvious that politics is a wild card (once again, see above). Despite that, the economic fundamentals for a more stable pricing environment remain intact.

About Our Fuel Outlook:
We are not fuel experts. Nor do we desire to be. But, fuel is first or second in your costs categories. You have to be prepared for swings in this category. Use these numbers as a rational basis for understanding where fuel costs are headed; knowing that even relatively little problems can create quite large (short-term) fluctuations in the oil markets.