4 mins

Diesel Impacts of a Bearish Oil Market | Advisor Pulse

Matt Muenster


Matt Muenster
November 15, 2018


Crude oil entered bear market, declining twelve consecutive business days before reversing course on Wednesday, November 14th.

West Texas Intermediate (WTI) crude prices declined twelve straight business days between 10/29-11/13, depreciating to $55.69 per barrel and marking the US benchmark’s lowest close since early December 2017. This downward behavior came just weeks after prices reached four-year highs at $76.41 on October 3rd, equating to a 27 percent price devaluation in a timeframe of just 30 business days. Periodic production struggles and global speculation of tight oil supply ahead of renewed sanctions on Iranian exports contributed to the upward price shocks through the first half of October, before the Organization of Petroleum Exporting Countries (OPEC) decided to inflate production to near-maximum capacity and subside the persistent price escalation. Additionally, concerns over slowing economic growth and refined product demand played and equally important role in alleviating upward price behavior. Price impacts of Iranian sanctions – implemented November 5 – were tempered by temporary waivers granted to eight importers of Iranian oil, mitigating a portion of the anticipated price premiums initially thought to materialize after the renewed sanctions took effect. The short-term flexibility with Iranian compliance, paired with recent production gains from the OPEC cartel, assisted the oil market’s entrance into a bearish market, with additional contributions from OPEC and IEA forecasts showing decreased demand for crude and refined products (represented in the chart below). The recent bearish behavior follows a complicated stretch of oil market sentiment, with many of the peaks and valleys in price behavior connected to geopolitical tension that continues to move the price needle in various commodity markets.

While oil market dynamics often earn headlines, refined products – such as diesel – rarely earn similar attention, regardless of the partially bilateral relationship between the two commodities. Using the same October 3rd baseline, national wholesale diesel prices, too, have trended noticeably downward, declining approximately 36 cents per gallon – or 13 percent – since the peak of the heightened prices in early October. The visibility into diesel market volatility enabled through Breakthrough Fuel Recovery proved particularly important in the said timespan, as non-Breakthrough clients reimbursing carriers based on the Department of Energy’s (DOE) retail index failed to notice the daily market moves and, consequently, inaccurately reimbursed carriers for transportation fuel. From October 3rd to November 14th, DOE prices – and the time distortion that coincides with DOE reimbursement practices – revealed a net price change of just 0.4 cents per gallon, while national wholesale diesel prices fell approximately 36.1 cents during that same stretch (see chart below). With the fair and accurate reimbursement practices that Breakthrough provides comes savings potential based on the price differential between DOE retail index and actual wholesale prices. The difference between these two metrics, or the spread, reflects a proxy for the per-gallon savings Breakthrough clients can achieve, depending on time, tax, geography, and price of each specific movement.

The diesel market’s recent deflation, coupled with an inaccurate and distorted DOE pricing mechanism that fails to adjust in real-time, has greatly influenced spreads since the beginning of the downward price behavior. Since October 3rd, average spreads have increased from 18.1 to 54.7 cents per gallon, offering opportunity for substantial cost avoidance in Breakthrough clients’ transportation supply chains. To put the magnitude of the recent spread expansion into context, this was the first time DOE-wholesale spreads have eclipsed the 50 cent per gallon mark since February of 2018, while concurrently marking the largest spread since January of 2016. The chart below highlights a historic view of this metric – dating back to 2016 – revealing the significance of spreads eclipsing the 50 cent per gallon mark.

While average spreads that reach such prominent levels do not typically occur on a regular basis, Breakthrough clients still capture substantial savings in an area of their supply chain that comprises roughly 30 percent of total transportation spend. Interested in partnering with Breakthrough to remove distortion, achieve transparency, and establish fairness in your transportation network? Contact us directly. For further questions related to recent developments in the energy market, please contact the Applied Knowledge Team at AppliedKnowledge@breakthroughfuel.com.