by Scott Barrett, VP Business Development
“Summer lovin', had me a blast. Summer lovin', happened so fast!” For all you Grease fans out there, summer is just about here and so is the Energy Information Administration’s (EIA) Short-Term Energy and Summer Fuels Outlook for summer fuel prices.
This year’s summer fuel picture is full of interesting dynamics — demand decline, OPEC production quotas, economic growth, RVP season, increasing competition — and all are having an impact on where fuel prices are headed this summer. Just how lovin' will summer fuel prices be for your retail/fuel network? A closer look at supply and demand may tell the story.
Despite what is likely to be another record year for vehicle miles traveled, most experts agree that fuel volumes will decline in 2017, on average about 2 percent. So what’s happening with demand? For starters, CAFÉ (Corporate Average Fuel Economy) requirements continue to increase and new vehicle sales over the past two years have been brisk. For example, if you purchased a new car in 2016 that achieves 28 MPG, versus an older model, which only got 23 MPG, that’s a 21 percent improvement in fuel economy which translates to fewer gallons of gasoline consumed (assuming similar miles traveled).
Add to that a continued slow-growing economy, the ongoing explosion of online retailers like Amazon.com and Walmart.com, plus a significant increase in the number of electric vehicles on the road (anyone see a Tesla on the road today?) and it’s easy to see why demand is not as strong as fuel retailers would hope.
OPEC is doing what they can to trim supply, agreeing to hold in place the production cuts from last year. This may provide a bit of support for oil prices for the remainder of 2017; however, there is nothing significant in the near-term production picture that indicates a strong draw on supply. With much of the Canadian and shale-oil fields firing up again, the overall supply picture doesn’t support an extremely strong price posture over this summer. Barring any major interruptions to production, such as an unplanned refinery outage, a hyperactive hurricane season or a significant pipeline disruption, the flow of supply appears to be adequate for the current demand levels.
So what does all this mean for the summer outlook for fuel prices? It's entirely possible that the EIA’s price forecast for gasoline is appropriate; $2.40 to $2.50 per gallon feels just about right. Diesel prices will continue to trend roughly 20 to 25 cents-per-gallon higher than gasoline; however, regional variances will continue to vary greatly. For example, parts of California are already pricing above $3.00 per gallon as of a recent weekly price update from EIA. As we all know, the United States does not have a supply and demand problem. Rather, it has a product distribution problem, i.e., getting the right products to the right markets at the right time often presents challenges that ultimately result in supply shortages and price spikes on a regional level. But that is a subject for another article at another time.
The bottom line of the supply and demand story is that marketers can’t afford to chase gallons that are no longer available. So you need to benchmark your year-over-year volume performance against the market. To do anything else is going to sacrifice precious margin in a year that will already be margin-challenged. Keep in mind that the price run-up during the RVP season this year was not as strong as previous years, thus presenting less of a margin-harvest opportunity. Manage your margin carefully in 2017.
But let us not forget the rest of that popular Grease song…. “Summer days, drifting away….” We all know that time flies when you’re having fun. No doubt that this summer will fly by, but hopefully without sky-high fuel prices.
What are your thoughts on summer fuel prices?