Posted By RichC on May 23, 2005
Statistically, we all expect the price of diesel fuel to drop and the price of gasoline to rise in the summer. It is usually stated that the summer driving season puts a demand on gas, whereas the winter heating season puts the demand on heating oil. This is probably to simplistic of an answer, but this seasonal trait still always seems to exist.
As we approach the summer 2006 Ultra Low Sulfur Diesel (ULSD) Mandate, this seasonal trend is going to be interesting, particularly in how it will effect our overall economy. The summer/fall 2005 seasonal trends will probably reflect the normal swings … but I believe that the spring of 2006 will bring a shock to diesel fuel buyers, as well as all products being shipped using diesel transit in 2006. Fuel driven inflation could be about a year away.
I believe the 2006 change in seasonal trends will be due to the complexity of the ULSD conversion. Last week, in talking with a mid level fuel buyer and then a separate distribution company associated with Marathon diesel fuels from an agricultural supply perspective, Iâ€™m becoming more and more convince of a potential problem.
First, Marathon intends to make the switch to ULSD in the first quarter of 2006 when there will still be a supply of dirty D2 in the market. Why is this a problem? Well, projections from the ‘think tanks’ tell us to expect a 6 to 15 cent per gallon increase, BUT talk on the street has concerns that the demand for ULSD will be difficult to meet. The mid-level fuel buyer that I mentioned (he supplies to the Midwest and East Coast through a variety of shipping methods include the massive pipeline known as â€œthe Centennial Pipeline.â€ are already locking up supplies will California buyers ahead of the game in securing contracts. To add to the mystery in how we will make this change, once pipelines are purged (a massive â€˜do it onceâ€™ undertaking) and storage tanks are cleaned, the companies can’t go back. This puts a real bind on tanker trucks and depots that must spotlessly clean their tanks in order to prevent contamination of the new ULSD spec fuels. Spotless might be a strong word but from what I’ve been told, just a small amount of today’s D2 will push ULSD out of spec.
The concern is three fold: 1) Having enough supply of the ULSD available to meet the demand, 2) Purging and cleaning pipes, tanks, trucks, etc so as not to contaminate the higher priced ULSD, 3) Once switched having to compete with existing D2 that will be priced lower than ULSD. Concerns at the retail outlet on up is about maintaining cash flow as they make the rotation. Very few facilities have the infrastructure to carry both products as the same time.
The concerns are if a company converts early, they will lose revenue to those still selling dirty D2 and that the price due to shortages of ULSD will initially be far higher than the projected 5 to 15 cents per gallon. Stay tuned and plan ahead for a change in seasonal patterns and potentially fuel cost related inflation pressures next year.