by John Keller | Dec 18, 2014 | Fuel Price Management Solutions, Fuel Pricing Strategy, Industry News
At the close of the NYMEX today, Oil traded at $54.70 bbl, down $1.77 from yesterday. Gas prices continue to plummet across the US, and experts predict that gas prices are not yet at their lowest.
That’s a pretty safe prediction, given that it takes time for decreased NYMEX oil prices to make their way through refining, to wholesale, to the retail channel. And since a $5 drop in crude can equate to a $0.12 drop in gas prices, it’s not unreasonable to expect retail fuel prices to drop that much in the coming days. Many fuel retailers are experiencing a time when their replacement margins are routinely below their actual margins, since the cost of buying a new load today is less than what they paid yesterday (or last week, depending on how quickly they turn over the inventory in their tanks).
What does this mean from a fuel price management perspective? First, it means we can expect to see increased retail fuel margins to finish off the year. That should make Q4 of this year one of the strongest in recent history.
Second, it’s important to consider that the retail fuel pricing game is not as simple as the basic price elasticity principles you learned in Microeconomics 101. Consumer psychology is always at play. As a wise fuel manager once taught me, sometimes lower gas prices lead to the customer reaction of waiting to see if the prices drop even further. And now that the US culture has started to get used to falling gas prices, just because you drop retail fuel prices at your locations doesn’t mean you’ll automatically see an uptick in fuel volumes.
The retail fuel pricing business requires no less finesse in these times than in times of low fuel margins. Fuel pricing software like PriceAdvantage continues to be critical for analyzing your business so you can always have the right price at every store all the time.
by John Keller | Dec 12, 2014 | Fuel Price Management, Fuel Pricing Strategy, Industry News, Retail Fuel Margins
According to OPIS, the average retail fuel margin across the US just made its largest increase of the year, jumping $0.097 per gallon from last week. That means we have an average retail fuel margin of over $0.30 a gallon for the fourth time this year. This week the retail fuel margin average is $0.336. That’s $0.145 per gallon higher than this week last year.
The year to date retail fuel margin average now stands at $0.211 per gallon. The Q4 average is $0.290 per gallon, and the six week average is $0.271 per gallon.
This is not the time of year where we see high fuel volumes from miles driven, so these margins don’t have as much of a revenue impact as they would during the summer months. But at least we can expect to see strong margin opportunities through the Christmas holiday season into New Years.
by John Keller | Dec 12, 2014 | Fuel Price Management, Industry News, Retail Fuel Margins
As reported in an earlier blog article, in their attempt to defend market share, Saudi Arabia decided last month to continue their oil production despite pressure from other OPEC members to cut back. In so doing, Saudi Arabia anticipated that oil would settle at $60 a barrel, and apply pressure to US drilling efforts that cannot break even at that price point.
Yesterday oil closed at just under the $60 mark, and today it closed at $57.50 per barrel. So the Saudi strategy seems to be happening even faster than some may have thought.
Already there are US drilling companies who are backing off plans to drill in sites where it costs more than $60 a barrel to extract the oil. Others are looking into capping some drilling locations, though that isn’t always an option based on signed contracts. According to the Wall Street Journal, new drilling permits have dropped sharply. ConocoPhillips announced they will spend 20% less next year on drilling wells, focusing only on the most profitable spots.
However, there are still spots in South Texas where drilling is still profitable even at $30 a barrel. The Bakken area in North Dakota has a break even point at just under $50 a barrel.
We can’t attribute the global price drop of crude entirely to the Saudi decision. Weaker anticipated demand in Asia also has a significant impact. But no doubt, as long as OPEC continues with their production levels, and the US stays close to what it’s producing now, we can expect to be awash in oil, and see oil prices the lowest we’ve seen in years.
by John Keller | Dec 8, 2014 | Fuel Price Management, Fuel Pricing Strategy, Industry News, Retail Fuel Margins
There’s a terrific article in the Emporia Gazette, a publication in Emporia, Kansas, about why diesel prices are dramatically lagging the drop of gasoline prices we’ve seen over the past months.
In June, US crude was trading at just over $106 bbl, its peak of the year. Since then, the price of crude has dropped about 35%. Gasoline prices have fallen roughly 24% over that same time period. That’s not unusual, since it always takes time for crude price changes to make their way down the supply chain to the retail channel. What does seem odd is that diesel prices have only fallen about 9%. In some areas, the spread between regular unleaded gasoline and diesel is $0.81 a gallon, in other areas the spread is nearing $1 a gallon.
As the article explains, the reason for this gap can be summarized in five points:
1. The US federal tax on diesel fuel is 6 cents more per gallon than gasoline, so the fixed cost of diesel will always be higher.
2. The US demand for fuel used for traffic is changing. The year over year demand for gasoline in the US has been gradually trending downward, in large part due to increased gas mileage efficiency of fleet cars. But the US demand for diesel this year has been much stronger, in large part due to the increase in truck traffic caused by a stronger US economy.
3. Diesel needs to be considered its own commodity, independent of gasoline, because there is substantial demand for diesel outside of car and truck traffic. More equipment is burning diesel, most notably the equipment that fracks crude out of shale formations, and with the rise in US oil production, that equates to a big deal. Also, it has been a late harvest in the Midwest US, and busy farmers make for busy equipment that demands more diesel. Finally, since heating oil and diesel are essentially the same, the recent cold weather and heavy snow across the US has led to a corresponding increase in demand for home heating oil.
4. US refineries are built to primarily produce gasoline, not diesel. From each barrel of oil, US refineries produce 18 to 21 gallons of gasoline vs. 10 to 12 gallons of diesel fuel. It would take billions of dollars to pay for the significant upgrades needed for refineries to create a higher percentage of diesel.
From a fuel price management perspective, it’s unlikely we’ll see any short term dramatic diesel cost decreases, since diesel demand should hold steady as the US economy continues to grow, winter has set in, and there is no end in sight for fracking. When comparing year over year demand for diesel, you may see a positive volume trend, depending on the customer type at your locations.
by John Keller | Dec 6, 2014 | Fuel Price Management, Industry News, Retail Fuel Margins
The OPIS report today revealed another slight drop in the average US retail fuel margin. The US average now stands at $0.239 per gallon, down $0.019 per gallon from last week. The year to date average margin was up slightly to $0.209 while the Q4 average was down slightly to $0.285 per gallon. The six week average dropped over $0.02 to $0.267 per gallon.
Despite the second consecutive weekly drop, the average retail fuel margin still stands $0.029 higher than this same week last year.
With only three more reports coming this year, we can expect the average margin for the year to be a solid $0.209 per gallon, which would be a solid $0.01 per gallon higher than last year. The most exciting news will be to see how strong Q4 can finish. Last year the fourth quarter sported a $0.200 per gallon average. So far we’re over $0.08 per gallon above that. It’s unlikely we’ll see any dramatic margin drops through the end of the month that would take us below that $0.08 gap. From a fuel price management perspective, that means we can expect solid earnings for Q4.
by John Keller | Dec 5, 2014 | Fuel Price Management, Industry News, Retail Fuel Margins
According to the Wall Street Journal today, Saudi Arabia increased the oil prices discount to the US and Asia, showing a strong commitment to defend market share against US production. The US price dropped between $0.10 and $0.90 a barrel to the US, and between $1.50 and $1.90 a barrel to Asia.
As reported earlier, Saudi Arabia is expecting crude prices to settle at $60 a barrel. Kuwait announced yesterday the country is basing their 2014-2015 budget on barrel prices of $55-$60 a barrel. Depending on the expert you read, that is anywhere from just at break even to $16 a barrel below break even.
At the time of this writing, global crude prices are slightly lower.
