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Key Drivers of Fuel Market Volatility & How to Mitigate Risk

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In a market characterized by both global and local dynamics, fuel costs are an exceptionally volatile portion of shippers’ transportation energy spend.  Prone to change at the drop of a hat, the fuel market is often a tempest of price movement, leaving shippers at the mercy of forces seemingly beyond their control.

As with any complex system, the key to understanding the drivers of fuel market volatility is to map the myriad factors that influence it— from large to small-scale. By understanding how these factors influence fuel prices, shippers have the unique opportunity to prepare for future cost changes and choose solutions that control or minimize the possible risks ahead.

Global Dynamics Impact Prices Across an Entire Network

While shippers who utilize a market-based fuel reimbursement program witness just how drastically prices may fluctuate in different regions of their North American freight operations, it’s also crucial to take a larger look at the entire crude oil ecosystem globally. Events that often seem distant play a huge part in fuel price movement on a more granular scale.

For example, global geopolitics influence fuel market volatility by impacting both crude oil output and its pricing mechanisms. Oil production in hotspots of geopolitical conflict, such as Northern Africa and the Middle East, are especially subject to such pressure. In Libya and several of its regional neighbors, Islamic State Militants continue to target energy infrastructure. Disruptive actions such as blockades and intentional damage to equipment can shut down whole pipeline networks, dramatically reducing a country’s production, diminishing oil output, and driving prices up globally.

This unrest, paired with economic activity driven by oil cartels and tariffs between competing global  powers can create further fluctuation in prices. Until 2014, The Organization of Petroleum Exporting Countries (OPEC) held the most global power in determining oil prices, with roughly 80 percent of global oil reserves located in member countries. Though they now comprise only about one-third of the market-share of global oil output, the organization can still dramatically influence the market outlook by shifting their production targets.

This is further demonstrated by the recent announcement that they would be in high-production mode, which led to volatility in Brent crude oil throughout October. After reaching a price over $86 per barrel for the first time since late-2014 to start the month, Brent shed over 15 percent to fall below $73 per barrel to close it.

Read more about October and November’s significant price drop here.

Policy issues, tariffs, and economic activity can also alter supply and demand dynamics between the US and other competitive economies. Recently, tariffs on goods moving between the US and China have already impacted crude oil prices, creating global oil demand uncertainty and causing downward price movement.

Regional Dynamics Hit Closer to Home

Shippers may also see volatility on a more regional scale in their network. For example, fuel costs observed on the East Coast may be very different than those of the West Coast. One explanation of this involves the presence of different pipeline distribution networks across the country. District 5 of the United States Petroleum Administration for Defense (PADD5) contains pipeline networks west of the Rocky Mountains, which are isolated considerably from the rest of the country. Without adequate supply reinforcement, outages in this western network, or the few channels that lead to it from eastern regions, can cause dramatic price increases due to limited supply.

Source: U.S. Energy Information Association

Regional price dynamics are further shaped by seasonality. In the Northeastern United States, heating oil, which is chemically identical to diesel fuel, is used as a source of electricity. During cold winter months when large amounts of electricity must be generated to meet municipal heating needs, the power generation industry competes directly with the transportation fuel industry for diesel supply. When a winter is especially cold and long-lasting, price pressure impact and market volatility are especially prevalent, with challenged diesel inventories and noticeable changes in fuel price for shippers’ movements throughout this region.

Seasonal refinery maintenance also commonly impacts supply pressure on fuel market prices. From October through November in the fall, and March through April in the spring, routine maintenance of refinery operations shuts down large portions of oil refining operations. Though crude oil inventories expand in response, refined products experience a period of shorter supply, resulting in amplified regional differences in final fuel price. These maintenance events can sometimes uncover larger issues as well, which may extend unplanned refinery downtimes.

Turning Volatility into Opportunity

Because volatility can be attributed to many different large and small-scale factors, managing transportation fuel budgets is a difficult process– how do shippers account for what may or may not happen at the local, regional, or even global scale?

One of the best ways to navigate this volatility is through a fixed-price fuel solution, where shippers lock in the price of fuel based on the scope, geography and timing of their freight movements. With a Breakthrough Transformational Fuel (T-Fuel) engagement, shippers create fuel budget certainty, while avoiding the traditional risks associated with fuel hedging.

After implementing a Breakthrough Fuel Recovery Program, shippers have access to a robust dataset, which Breakthrough then utilizes to unlock a host of additional solutions. We use a shipper’s unique data to pinpoint areas of their network that would benefit from locking in a fixed-fuel price. If a client all they have to do is pay the locked-in rate for fuel and Breakthrough will do the rest, taking on the associated complexity, time, and risk.

Though the fuel market may be inherently volatile, utilizing a fixed-price solution, like T-Fuel, enables a new degree of certainty to their fuel budget. Global marketplaces will continue to face geopolitical turmoil and economic uncertainty, as well as more localized fluctuations. By strategically choosing to ensure a set price of fuel for their network, however, shippers gain a market advantage, and exercise new opportunities in fuel budget management.

If you are interested in discovering ways to bring T-Fuel into your organization, please visit our solutions page. To learn more about the market dynamics it can help you navigate, contact our Applied Knowledge team directly.

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