Fuel Prices: What’s going on?

Posted By on September 7, 2006

Thorton's 9/6/2006 Gas/Diesel PriceEveryone with a car, truck or SUV has noticed the drop in gasoline prices at the pump … but not all vehicle ‘fuels’ are seeing that same relief. (an 80 cent difference is about all a ‘diesel’ owner can take!) Anyway, I did a little digging today in hopes an expert might be able lend some insight on “what is going on” and found some help through a friend in Chicago.

Tom McCready is a institutional futures trader and he was willing to talk with me a few minutes as to what he sees. His conclusion is that last year refined fuel inventories were low as Katrina came ashore and impacted the refinery production supply of gasoline. Crude oil continued to rise which created a nervous market and so prices were traded up.

According to Tom, refineries were working as quickly as possible to get back to 100% with the stimulus being that they were the beneficiaries of high fuel prices. They had a real incentive to produce all the gasoline they could during summer driving season. Also contributing to higher prices were the events in the Middle East as well as predictions for an active summer/fall hurricane season.

Now, we have strong supplies of refined gasoline, the summer driving season is over, turmoil in the Middle East has wained, and we’ve yet to see a significant threat to refineries from hurricanes. This equates to lower ‘gasoline’ prices and futures trading that can move as quick in the other direction.

According to McCready, he doesn’t see diesel, jet fuel or heating oil in excess, besides they have their traditional peak season ahead. The inventory and stepped up refining was not the same as it was for gasoline. He had no comment on the switch from LSD to ULSD; I have heard from others in the industry that suppliers are struggling to get enough Ultra Low Sulfur Diesel to market.

Your thoughts?

Comments

  • Steve

    Hi Rich.

    Your friend McCready says he doesn’t see diesel etc. in excess…

    But I just left a CNN-Money report that states:

    “U.S. weekly inventory data due later Thursday (today) were expected to show a 1.3 million-barrel drop in crude stocks, but a 1.3 million-barrel build in distillates, which include heating oil, jet fuel and diesel. Gasoline stocks were seen down 800,000 barrels.”

    So I ask of McCready, in excess of what? Gas inventory goes down and yet the retail price falls. Diesel inventory goes up but the price is holding pretty constant if not rising. Your photo in Ohio is pretty dramatic! Here in NJ I am paying 2.79 for diesel vs $2.75 for RUG, at the same station.

    At first approximation it seems that diesel price at the pump does not obey a classic supply and demand relationship with inventories (which I have watched rise in year-over-last every month over the summer while the price of d-fuel at pump stayed same or went up) .

    Basically, I am not happy with McCready’s explanation. It simply does not accomodate what has been happening in the retail market this summer.

    I am anxious to get your thoughts on this as its very perplexing to me that we (Diesels) seem to pay more and more evn when inventories are steadily going up. Note of disclosure: for a brief period of about a month (~7/15-8/15) diesel here in NJ was 10-15 less/gallon vs RUG.

    Steve

    PS- Sorry if I sound shrill towards your friend 😉

  • I’ve also noticed that diesel wasn’t falling as fast as gasoline here in New England. I figured it was two things: 1. The requirements for higher percentages of ULSD 2. Home heating oil demand is about to come back to our region. (and propane) Since home heating oil is essentially diesel, it’s keeping the supplies lower, perhaps?

    Don’t know for certain. I figure it’s all transient. With my TDI getting 50mpg, I’m not moaning too much about the price difference.

  • Steve,

    I suspect everyone has their opinion … but since Tom puts money where his mouth is, I do put some value in his comments … but it doesn’t mean his view is correct!
    🙂
    That said, he really didn’t seem to have a convincing answer to the ‘difference’ … which I tried to express in my post. (probably wasn’t clear) I was uncomfortable when I started asking about the LSD to ULSD roll-out and Tom didn’t seem as if he had an opinion. Maybe traders just aren’t seeing that as a big deal …. or have it already factored in since last year???

    As for the New England vs. MidWest’s 80 cents/gallon difference … who knows. I guess it is just what the market will bear? I also try to ‘think like Scott’ … at 45 mpg on our two ‘biodiesel filled’ TDIs I try not to moan too much either. (great photo of your car Scott)

  • Jim Hunter

    Interesting photo and thoughts. Up here we have a difference but not as extreme. Where again are your from Rich? Chicago?

  • No not Chicago … that’s my friend’s friend … Tom McCready. I’m in SW Ohio near Cincinnati. The sign might be extreme, but its what all the station in my area are showing within a few cents.

    I was traveling earlier this week and spotted 2.87 for diesel, and about 2.26 for gasoline. (yesterday the drop at one station was at 2.18 for gasoline but diesel prices haven’t budged much)

  • Steve

    Scott-

    I thought about the 2 points you mentioned (ULSD and home-heating) effecting price.

    But with diesel inventories building all summer it’s not clear to me why the price has stayed more or less constant. Afterall, the stuff coming out of the pump I use is/was not ULSD. Now if the diesel price spikes in late 2006, the ULSD connection would seem to be an obvious one. I think the same way about the H-H-oil. Basically, that’s not a summer price input, but a Fall/Winter input.

    The only rationale I can bubble-gum together is that even though inventories of diesel have been building (over last year same time point) is that somehow they (of the commodities market) expect demand to outstrip the accelerated build-up in inventory. But where does that speculation derive from? A farmer’s almanac?

    It’s very disappointing- this lack of obvious answer/solution.

    I certainly understand we come out ahead with our TDIs, I’m just very wary that as minority consumer we’re being taken advantage of. Paranoia maybe?!?

    Enjoying the discussion,
    Steve

  • Sam

    Here in Las Vegas we are seeing a price difference between RUG and diesel of about 30 cents/gal. RUG has been dropping, diesel has not even though Haycock Petroleum is supplying biodiesel (B5) to a lot of stations in the area. They were quoted recently in the local paper as saying the biodiesel would replace about 250,000 gal of diesel in this market over the next year. ULSD is available but not all stations have it yet. There is very little heating oil demand in this area so hopefully the prices will drop soon.

  • Steve

    Guys,

    If you’re still interested, here is the actual data of inventories released (source: CNN Money, accessed today, 9-8-06).

    “U.S. distillate stocks, including heating oil, rose 3.1 million barrels to 139.9 million barrels in the week of Sept. 1, the highest level since January 2002, the Energy Information Administration said.

    Gasoline inventories rose 700,000 barrels to 206.9 million, against analysts’ forecasts for a decline.

    Crude stocks fell by a larger-than-expected 2.2 million barrels last week, but supplies remain about 6 percent higher than a year earlier.”

    Steve

  • Still here … but then then I have a vested interest.
    🙂
    Great inventory numbers Steve. The inventories seem to point to what the price at the pump is reflecting … except for what I’m seeing with diesel fuel. I’ve not priced out heating oil, but for those using it for their homes this winter it would be nice to see some relief.

Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.