The U.S. and Iran exchanged attacks, Saudi Arabia and Russia entered an oil price war, and the World Health Organization declared a global pandemic before the end of the first quarter. Each of these events, alone, could be definitive for a year in the global oil market. But during 2020, they occurred within 10 weeks.
Calling 2020 a Volatile Year Seems Like an Understatement
The intense market volatility thus far into 2020 is best represented by a $55 per barrel collapse of the U.S. oil market’s West Texas Intermediate (WTI) front-month trading contract within a single day—Monday, April 20—and more than a $45 per barrel rebound the following day.
The coincidence of the new single-day record for the WTI plunge is that $55 per barrel was approximately the aggregate forecast for WTI across firms to begin the year.
Of course, the figures above only represent the 2020 volatility within the oil market. They do not begin to describe pandemic-driven shocks and volatility that have entered other markets. In particular, the events of 2020 have made forecasting and budgeting across freight transportation networks seemingly part of a daily exercise regimen.
The Breakthrough Applied Knowledge and Data Science teams have been busy with diesel fuel price and freight transportation forecasting for years, and volatile markets elevate our focus. We presently forecast fuel prices across domestic and international modes of freight transportation, including truckload, rail, and ocean freight.
We also forecast freight demand in the domestic U.S. truckload market and are progressing with forecast models to provide clients with guidance for freight rates. While there are many different models and styles of forecasting across these services, volatile markets offer a reminder to focus upon forecasting principles.
1. Don’t Forget About Market Fundamentals.
High prices cure high prices, and low prices cure low prices. Whenever there is an abrupt change or shock in a market there is likely to be a coming adjustment from the other side of the supply-demand balance.
COVID-19 has inserted massive shocks to both supply and demand across markets and prices have responded accordingly. In the oil market, one need not look any further than the effect felt on April 20, as shown above. Of course, oil producers could not continue business for long with oil fetching less than nothing.
Oil producers responded in a major way, regardless of market structure. The OPEC+ cartel agreed to reduce their daily oil production by over 9.5 million barrels of oil. Market pressure in the U.S. and Canada saw oil and natural gas rig counts fall to their lowest figures on record. These developments led to a quick increase in oil prices and returned prices to over $40 per barrel (see above).
These supply changes will continue to bring low oil prices higher, essentially “curing” low prices for ailing oil producers. Focusing on these fundamentals moving forward remains critical for budgets, particularly since there is market risk for an overcorrection over the long-term.
2. History Will Continue to Offer a Helping Hand
The monthly average price of U.S. wholesale diesel fuel has decreased from May to June during nine of the past 11 years (includes June 2020). There is more to this occurrence than coincidence, of course.
Refinery utilization routinely ratchets up for the summer driving season in response to greater gasoline demand and its seasonally higher premium for refiners. As a consequence of producing more gasoline, the refining process also puts more diesel into the market, and the increasing diesel supply weighs down prices. Without history, one might miss this seasonal development.
Diesel prices rose from May to June in 2020 but predominantly because the price of crude oil was rising dramatically. A close look at the premium for diesel fuel from the crude oil it is manufactured from reveals this seasonal trend was limiting the price ceiling for diesel fuel this year, too.
COVID-19 has generated historic outcomes that have been compared with events spanning more than a century. Some comparisons have been helpful, others not, and plenty of other comparisons remain food for thought as we forecast and plan budgets for the months and years ahead.
3. There is Strength in Numbers
Breakthrough’s services enable precise fuel and freight forecasting. We capture data from about 60,000 daily freight movements that equip us with near-real-time market intel to project the budget impact of events like a tightening freight market and state fuel tax increases. While this transparency to precise data is critical for forecasting, this third principle goes another direction.
Our forecasting teams routinely gather to challenge market perceptions and individual perspectives. These meetings and conversations collect our diversity of thought and create a broader knowledge base for forecasting. The growth of our team, client base, and broader industry network continues to grow our forecasting potential. This synergy is particularly beneficial in volatile transportation and energy markets to avoid impulsive behavior that leads to under or over-reacting to change.
Help Your Forecasting Evolve in Volatile Markets
The amount of data and information discussed during a normal business cycle can be overwhelming, so when disruption occurs, and cycles become volatile, it is beneficial to elevate forecasting principles. Whether focusing upon the energy consumed or the volumes moved across a transportation network, focusing on market fundamentals, drawing comparisons with past markets, and challenging perspectives through a diversity of thought will enable organizations to cut through the noise and keep budgets connected with market dynamics.