A Crude Explanation Of Oil And Trucking

Back in October I correctly predicted crude oil prices would fall to $76/barrel, which it did, for about a day. It then keep falling, due to OPEC no longer being able to control the supply, which I also correctly pointed out it that post.Now crude is around $48/barrel and questions are being asked about how this impacts the economy and the trucking industry.

How low will crude prices go?

The lowest prediction I have seen is $20/barrel.  Some very reputable economists are predicting a bottom in the low-to-mid $30s, still others say we have already bottomed out. Word is that supplies are building around the world and OPEC keeps pumping away.  At some point production has to slow and rationality in the markets prevail.  If you split the difference between the bears and bulls in this market, expect around $40/barrel as the bottom.  

When will prices start to rise?

Expect a steady, measured, rise back to a more stable equilibrium point.  The industry experts say this should be $70-$80 a barrel.  There is disagreement on how long it will take to get back up there.  Some economists say as early as six months from now, while others as long as mid-2016.

Why haven’t diesel prices fallen as fast as gasoline prices?

Diesel prices were subjected to some very odd circumstance during the last quarter of 2014.  Diesel prices were around $4/gallon when the fun started.  Some major disruptions at refineries in the Midwest allowed diesel inventories to plunge to near record lows.  If the price of crude had stayed around $100/barrel, diesel prices would have spiked to $5/gallon as the demand for heating oil

(similar to diesel in composition) started to rise.  But just as this inventory crisis was occurring, crude prices started to plunge.  Therefore you had this “tug-of-war” on price.  At first diesel prices didn’t budge, then started to fall slowly.  Refineries are still trying to build inventories back to normal levels, so diesel prices will keep falling gradually.  If crude is still cheap in March (when heating oil demand drops) and inventories are fully restocked, then you will see the full, expected, bottom in diesel prices.

What impact will the lower crude prices have on the economy?

Some economists predict a huge economic boost, while others say the impact is negligible.   A few experts have tried to calculate the impact of low crude prices on GDP.  This is a difficult endeavor because of the sheer mass of the data and the fact that while some industries thrive due to low crude prices, others, especially fracking and other oil related activities, are hammered. These estimates indicate GDP will only be 40 to 80 basis points higher in 2015 due to lower priced crude.  This is certainly a positive factor, but not a boom.  However, these calculations cannot measure the positive psychological boost provided by lower gas prices.  This factor is probably more impactful than normal because most consumers have been in a fearful funk since the Great Recession.

How do lower diesel prices impact truck freight?

Again you have a tradeoff between markets. Oil and exploration related freight will suffer, however other freight markets will grow due to increased consumer spending.  Therefore it is a net plus, but not a big change.  Fleets profits will grow due to lower operating costs, however this is also tempered by the use of fuel surcharges which were implementing when fuel prices greatly fluctuated in the past.  Freight rates should not drop because industry capacity is tight and driver pay is increasing due to labor shortages.

Word on the street is that two large fleets just signed 3-year diesel supply agreements at around $3.50/gallon.   This shows that fleets value price stability over getting the absolute lowest price. It also indicates the fuel industry expects crude prices to stabilize around $80/barrel in the mid-term.

How will lower diesel prices impact the need for new trucks and trailers?

The number of fleets buying new trucks to take advantage of the improved mileage of the new engines could slow.  But you would have to assume that crude prices would stay low throughout the life of the truck, which is unlikely. 

Conversely, higher fleet profits means there is more money available to buy new equipment.  Increased freight due to economic growth would support more expansion demand. 

New trailer demand would but subject to the same trade-offs as the economy.  Trailers used in the energy sector, tanks for example, will suffer.  While the other segments should benefit moderately.

Demand for Class 8 natural gas powered vehicles will slow because the payback period for buying a more expensive natural gas truck is now much longer than it was six months ago.  Sales should increase when crude stabilizes later this year.

Regardless, crude prices fell throughout Q4 as Class 8 trucks set a record for number of orders in a quarter.  So be assured, the market is not being slowed in any way by cheaper crude and it may be helping lead the charge.