FUELSNews 360° – Executive Summary
While Q3 lacked a strong directional bias for prices, the quarter was not without volatility. Economics, geopolitics and fundamental forces joined in a tug-of-war that kept crude prices range-bound between $50-$60 per barrel throughout the quarter.
Oil Market Summary
The pervasive theme throughout the quarter – and more broadly in 2019 – has been the slowing global economy and declining oil demand. Most major oil and economic reports have sliced their demand predictions for 2019 and 2020, some many times, to keep up with weakening sentiment. Perhaps most alarming was a yield curve inversion in August, stirring up warnings of an approaching recession. Central banks worldwide have reacted in step, cutting interest rates to stimulate economic growth. These actions have helped slow the descent of oil prices, at least for now.
The economy can hardly be mentioned without considering the US-China trade war. The repercussions of tariffs are rippling through developing economies, though economists disagree on the full impact. The trade war is covered in more depth on page 12.
Even as OPEC managed supply through production cuts, they were unable to sustainably move prices out of a narrow range during the quarter. The transition of Saudi Arabia’s energy minister gave markets a brief fright, but the new minister, a member of the royal family, promised to maintain the group’s focus on managing global supplies to offset rising American production.
No event more clearly demonstrates the market’s bearish bias than the drone attack on Saudi Arabia’s oil production, the largest oil infrastructure attack in history. With 5% of the world’s oil production offline, markets rocketed higher overnight; within a week, however, prices had returned close to previous levels. Saudi Arabia quickly filled the production gap, and an event that would have caused $50/bbl gains a few years ago came and went with virtually no discernable impact.
While the attacks did not significantly alter oil fundamentals, it did reveal the vulnerability of world oil outputs. With America and Iran at odds, Middle East risk has risen. Oil tankers attacked and abducted in the Strait of Hormuz and the Red Sea caused fears that tensions could escalate – eventually disrupting oil flows on a broader scale.
Looking ahead, prices appear comfortable with the narrow band we have seen for the past several months. All eyes will remain on the US-China trade war for signs of improvement or regression, though little progress should be expected. With IMO 2020 around the corner, transportation companies are closely monitoring diesel inventories for signs of tightening.
Regional Fuel Overview
On the East Coast, the PES refinery closure in Pennsylvania created a regional supply gap, pitting Northeast consumers against Latin American purchasers in a bidding war for Gulf Coast refined products. While Gulf Coast refiners should meet the call for more supply, the refinery shutdown could cause short-term disruptions, especially during severely cold weather. Dan Luther explains in greater detail on page 22.
Hindered planting in the Midwest due to record rainfall could result in less acreage to harvest and accordingly less diesel demand in the fall. At the same time, local refineries have struggled with production issues. Which factor will control fuel prices? Dive deeper with Dan Luther on page 26.
On the West Coast, supply outages and high prices due to refinery outages continued into Q3 from the previous quarter. Sara Bonario shares how these market conditions affect fuel buyers on page 28.
The rise of truck insurance premiums is rarely discussed, but is a big factor impacting the logistics industry in the last several years. Learn how to combat rising truck insurance rates with Nikki Booth on page 35.
As companies prepare for their 2020 budgets, they have a wide array of questions on how to control their fuel prices. Learn about best practices on page 40 with Mansfield’s methodical checklist on fuel budgeting. Not sure what price target to use for 2020? Alan Apthorp succinctly summarizes market forces and presents a 2020 price forecast on page 36.