Yesterday’s market movement may have left some asking: “What just happened?”
Crude oil sank by $10/bbl, while diesel and gasoline posted astounding 30-cent losses. So far, the typical bounce often seen after a selloff has not materialized, which indicates traders aren’t willing to buy the dip and bid prices higher. As analysts review yesterday’s events, the key question is: is this a new trend or a temporary drawback?
First off, why does that question matter? If fuel buyers expect prices to rebound, then today’s prices are an excellent opportunity to lock in a fixed fuel price at less extreme levels. Diesel prices are down more than $1/gal in just three weeks, and gasoline is down 90 cents from its June highs. If prices are about to spring higher, now is the opportune time to stabilize your 2022 budget and ensure lower costs for the remainder of the year. On the other hand, if prices are finally trending downward, then locking in now won’t be particularly helpful.
So, which is it? In reality, no one can say with certainty. There are just too many confounding factors to know with 100% confidence what the future holds for fuel prices. Goldman Sachs believes the market has “overshot” a reasonable price level, blaming the steep loss on lighter volumes during a holiday week and technical trades pushing prices farther than usual. They also noted that oil markets remain at a fundamental deficit, with no evident relief other than higher prices and demand destruction. It’s worth noting that fuel demand in the US has been somewhat weaker than expected, but worldwide demand remains strong, with more demand growth expected.
What does this mean for fuel consumers – should you buy the dip or wait it out? There are plenty of reasons to believe fuel prices will snap back to higher levels as demand continues unabated. If anything, lower prices could stimulate more fuel demand, causing an even bigger imbalance in the future. The Russia-Ukraine crisis won’t end anytime soon, OPEC countries are struggling to find ways to increase production, and demand worldwide remains strong. All of these factors point to big price hikes ahead. Fortunately, corporate fuel buyers have options that don’t require gambling on market movements – or doing nothing, which is its own gamble. Companies can choose to lock in a price cap based on current price levels, setting a ceiling on prices if the market rises but allowing the company to benefit from lower prices if the market falls.
Want to learn more? Contact Mansfield’s risk management team to learn if a fixed price or price cap is right for your business.