by FreightWaves’ John Kingston
Here’s what is almost certainly frustrating many truck drivers and shippers as January draws to a close:
On Jan. 2, the first trading day of the year, ultra low sulfur diesel (ULSD) settled on the CME, the main energy trading platform, at $2.0241 per gallon. A day later, it settled at $2.0614. On Monday of this week, it settled at $1.6795 before rebounding Tuesday to $1.7159. The Jan. 3-27 decline was 18.5%, a drop of roughly 38.2 cents.
On Jan. 2, the national average price of wholesale diesel in SONAR’s ULSD national rack price was $2.0594 per gallon. On Tuesday, it was $1.7706 a gallon, a drop of 28.8 cents or 14%.
On Jan. 2, the national average retail price of diesel according to the DTS.USA data series in SONAR was $3.0696 per gallon. On Tuesday, it was $2.9744 per gallon, a drop of just 9.52 cents.
Which leads to the question heard often during these times: Just what the heck is going on, and why aren’t truckers and shippers getting the benefit of these lower commodity and wholesale prices?
Wait: It gets even more extreme. The DOE/EIA weekly national average retail price, which is the basis for most fuel surcharges in the lower 48 outside of California, topped out this year at $3.079 per gallon in the price posted Jan. 6. This past Monday when it was posted, it was $3.01, a drop of just 6.9 cents from the recent high.
The FUELS.USA data series in FreightWaves’ SONAR market dashboard product is at its highest level in a year. It measured the spread between the national average retail diesel price and the national average wholesale diesel price.
“The whole flow of information from the price of a barrel of crude down to the retail level is a price pass-through,” Mason Hamilton, an oil market expert at the Energy Information Administration, told FreightWaves. “The way it happens is that you have rockets and feathers.”
The rockets refer to the retail price of gasoline or diesel when the broader commodity markets are rising. The feathers represent the pace at which it drops during periods of sharp market declines, like what has gone on since the beginning of January.
The issue is not in the wholesale price, also known as the rack price. The rack prices are tied to the physical markets that traders and other commercial participants engage in daily. Those physical markets trade as a differential to the CME price. That differential can swing with enough volatility that even if the CME price for ULSD rises, the overall price in a physical market like Chicago can go down, and vice versa. That’s one of the reasons why the national rack average has not dropped as much as the CME price.
But it isn’t a rockets/feathers trend in the rack markets. For a variety of reasons, the companies that set rack prices need to stay aligned with the physical market that is used as the basis for their prices. So a company like Valero setting the rack price in Milwaukee is going to look to the physical price in Chicago when it makes its decision, and that moves daily.
But after that is when the rockets and feathers kick in. “When you see the price of oil increase, retail stations are going to go out there and think that we need to raise the price because we need to refill the tank for the next purchase,” Hamilton said. “That causes the retail to go up like a rocket.”
But the movement on the downside is “asymmetric,” Hamilton said. “The retail stations think, I’ll drop my price 2 cents, but then the station across the street drops it 3 cents so it’s a little bit back and forth. The prices come down due to competitive forces over time but it’s much slower.”
The key point is that the decisions made at the retail level are not being made by a large oil company. A station flying an Exxon banner may need to buy its wholesale fuel from Exxon, and Exxon sets a rack price, but it’s the station owner engaged in hand-to-hand combat on the corner or out on the highway who decides how much to move up or down. And right now, the down moves have not come close to the declines in the CME price, the physical markets and the wholesale rack prices that base themselves off the physical markets.
For the people who put together the weekly DOE/EIA average retail diesel price used in fuel surcharges, it’s business as usual. On Monday, when the agency released its $3.01 price, the average national retail price according to the DTS.USA data in SONAR was $2.9866 per gallon.
Brian Milne, a product manager with DTN, a major supplier of pricing data to the energy sector, said after the release of the DOE/EIA diesel number this week he did a comparison between it and the DTN average rack price. He said through much of the fourth quarter, the rack average was between 32 and 34% of the DOE price. But the latest number blew that spread out to more than 40%.
Milne also used the “rockets and feathers” analogy in describing recent price movements. He added that a full pass-through of the price can take as much as four weeks.
However, that sort of specific date-measuring can be offset by an upturn in the market, leaving some of the decline to not be captured by the end users.
The DOE has a detailed explanation of its methodology on its web page. The key points: It surveys about 400 stations; reporting levels are at about 99% (and the stations are mandated to report); stations do exit the survey and new ones are admitted, as some outlets go out of business; it isn’t just a straight average as various statistical methods are applied to the data.
Amerine Woodyard of the DOE said there is a market demand for more granular information in the survey. She said the DOE did survey the subscribers to the data earlier this year to get their input on improvements that could be made in the weekly price. Specifically, she cited requests for a truckstop-only price vs. a service station-only price, and more breakdowns by state. (California does have its own price and that number is often used by California-based companies for their fuel surcharges, given the huge gap between it and the national price.)
