Most shippers understand that variability in price, time, tax, and geography influences fuel costs that move goods to market. National price headlines tend to take center stage in the media, but regional behavior often has a more significant influence on localized pricing.
Discussing the upstream and downstream regional market fundamentals that all bear weight in diesel’s final pump price is critical to understand fuel spend. Managing fuel price fluctuations on a more granular level is the only way to achieve transparency and accuracy into 20-30 percent of a shipper’s total transportation costs.
Regional Spot Market: New York Harbor
The eleven states contained within the New York Harbor (NYHB) spot market include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. Eight key refineries supply this region’s demand centers. Nearly 60 percent of this market’s aggregate refining capacity originates from facilities in Philadelphia, PA, Trainer, PA, and Delaware City, DE.
Because the origins of most of this region’s refined products are confined to a small geography, prices are vulnerable to volume-based disruptions at the refinery level. Maintenance periods, unpredictable weather events, and other unexpected disruptions have notable impacts. When said events occur, refined product prices – such as diesel – are likely to incur price premiums on the back of constrained supplies. Refining facilities outside of this region with excess inventory are likely to fill the supply void. This balances the local disruption but tightens its neighboring market. Refined product imports – specifically diesel imports via marine shipping – account for roughly 100,000 barrels per day of this region’s available supply. This tends to fluctuate depending on regional refining dynamics and domestic product transfers. The give-and-take of product flows when similar events occur creates volatility, adding an additional caveat to a market with no shortage of contributors to price fluctuations.
The chart below compares the per-gallon spread between national wholesale and NYHB wholesale diesel to the national DOE retail diesel index. The two curves largely move in lockstep, though the average NYHB spread is typically lower due to tax premiums in Pennsylvania.
Breakthrough uses spread metrics to illustrate average savings when shippers switch to market-based fuel reimbursements. The spreads shown below do not indicate exactly what a shipper would save on Breakthrough Fuel Recovery since this would vary based on each specific freight movement, but rather act as an estimate of per-gallon cost avoidance.
Effects of Pipeline Disruptions in the New York Harbor Market
The Colonial pipeline stemming from the US Gulf Coast, and the Buckeye pipeline sending product from the Chicago region are the main arteries for fuel transport into and out of NYHB. Much like local refinery outages in Delaware, Pennsylvania, and New Jersey, pipeline disruptions tend to have a comparable effect on supply levels diesel prices in this region.
Pipeline disruptions may occur anywhere in the US, but they can still have price impacts on distant geographies. In 2017 Hurricane Harvey was a prime example of the interdependency of US pipeline networks. Stalled product flows in states bordering the Gulf of Mexico triggered a ripple effect up much of the east coast, including the northeast.
Historically speaking, supply-driven price premiums tend to correct themselves in a relatively short period of time, because outside fuel providers and imports typically step in to mitigate the impact of pipeline interruptions and reap the financial benefits of the resulting opportunity.
Seasonal Diesel Price Volatility in the Northeast
In the winter months, however, the NYHB region is especially susceptible to harsh winter conditions. Unlike much of the rest of the country which relies predominantly on natural gas for residential heating, the Northeast still uses heating oil in the winter. Rises in demand for heating oil, which is chemically identical to diesel, can often result in increased prices.
This seasonal price behavior is shown in the chart below, which depicts the basis differential between the NYHB spot diesel market and the benchmark NYMEX heating oil contract. This metric indicates how this particular regional market’s price compares to the national NYMEX benchmark. The episodic price spikes at the beginning and end of each year are a likely consequence of cold-weather stretches, in which increased demand pressure for heating oil occurs.
Through 2018, the NYHB spot market trended on a level basis with the NYMEX heating oil curve, averaging 0.1 cents per gallon below NYMEX heating oil prices. Basis differences in the final two months of 2018 finished in the opposite direction, averaging 0.2 cents per gallon as a result of colder temperatures. Through Q1 2019, the NYHB market averaged 0.2 cents per gallon below NYMEX, reinforcing the consistent, yet volatile, nature of this region.
Managing New York Harbor Spot Market Strategy
One of the consequences of regional pricing trends is that traditional relationships between local wholesale prices and the DOE Index can become increasingly complex. As a result, planning for future fuel expenditures has become more difficult for both shippers and carriers. With increasingly volatile price behavior on a regional level, carriers operating on DOE-based fuel surcharges face price uncertainty in the planning process, since regional and national market swings can have a large impact on their bottom lines.