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Spread between retail and rack diesel price could compress carrier margins in January

The spread between retail and wholesale fuel prices expand and contract, potentially doing the same to carrier margins (SONAR: FUELS.USA, FUELS.SAN, FUELS.DAL)


Chart of the Week: Retail to Wholesale Fuel Spread, USA, San Diego, and Dallas (SONAR:FUELS.USA, FUELS.SAN, FUELS.DAL)

Earlier this week FreightWaves released the retail to wholesale price spread on the SONAR platform. The significance of this metric may not be obvious to those not familiar with freight pricing. A lot of the time, fuel is a pass-through cost for truckload carriers (in the form of fuel surcharges), but when it moves up or down there is an impact to carrier margins. Looking at the fuel spread in various markets, San Diego has the highest value with $1.77/gallon, while Dallas has the lowest at $0.77/gallon. As the fuel spreads contract, carrier margins may do the same.

Trucking companies, particularly the larger ones, don’t buy diesel at the published pump price. They negotiate large discounts with fuel detailers and truckstop chains that allow them to cut out the retail markup and tie their cost much closer to the benchmark index price in the market. This allows over-the-road trucking companies to allow their drivers to fuel at the most desired physical location, without worrying that the retail price is higher than an alternative a few miles down the street. In these transactions, the carrier will pay “rack” (plus or minus a discount) plus taxes and transportation.

Fuel cost currently accounts for approximately 15% of the total freight charges (not including assessorial charges) on a bill on the average truckload shipment. According to SONAR’s net fuel expense, fuel expense for carriers is averaging roughly 4-6% of total revenue (meaning that nearly 2/3 of the fuel costs are being pass on to shippers in form of fuel surcharges).

When fuel costs increase rapidly, carrier margins will get compressed as the pass-through cost on the fuel surcharge is based on the weekly Department of Energy (DOE) report that measures the average price per gallon. The DOE rate moves much more slowly as it is further downstream in the sales cycle than the rack price, which is closer to what many carriers pay.

The DOE report is a survey that measures the average retail price of purchasing diesel at a truckstop or gas station across the U.S. The number is reported every Monday. This is typically not the price a carrier will pay, especially the larger carriers who have contracts with fuel companies that will offer a price that is closer to the wholesale or “rack” price. The rack price is much more sensitive and volatile than the DOE reports. The rack price also varies by market as is illustrated by the large discrepancy in fuel spread values in Dallas and San Diego.

FreightWaves SONAR platform has both rack and retail price of diesel organized by market of purchase. The difference between the retail and rack price is the spread. Unlike the DOE report which is only offered weekly, SONAR offers a daily truckstop retail (pump) diesel price by market. The retail price is collected from various truckstops across the country that focus on truck fueling.

Unfortunately, because taxes and transportation (of fuel) can vary based on factors such as fueling location from the refinary of choice and local taxes, SONAR’s wholesale rack prices do not include these numbers, while SONAR’s retail fuel index does. But what you can glean from the fuel spread is incredibly interesting.

The assumption is that taxes and transportation costs for the retail truckstops will stay fairly static year round, so it doesn’t factor into fluctuation of retail diesel price. What does change is the wholesale cost and the retailer margin. If the spread decreases rapidly, the assumption is that the carrier is paying a higher net cost of fuel (since less is being recovered in fuel surcharges). If the spread increases rapidly, the opposite happens: the carrier is spending less on fuel as a percent of revenue. In late 2018, the spread was very wide, suggesting that carriers that buy on wholesale were benefiting from the truckstops that were slow to pass on their savings to the retail pump customers.

As the spread contracts, carriers’ margins will do the same. Keeping in mind, the carrier will have a fuel surcharge with an index tied to per mile based on the current weekly DOE retail rate. According to DAT this average rate per mile is currently around $0.29 per mile with the current national average price of diesel being $2.97 this week. The current average rack price is $1.93, making the national spread $1.04.

On December 31st, the average price of diesel in the U.S. was $3.05 and the average rack price was $1.70. The rack price has jumped $0.24 while the retail price dropped $0.08. Most carrier fuel surcharge tables will move one cent per mile every $0.049, looking something like this:

Price per gallon Price per mile

2.90-2.949          .29

2.95-2.999          .30

3.00-3.049          .31

3.05-3.999          .32

Carriers have been getting less revenue while paying more at the pump. The chart below illustrates the total impact to the carrier margin.

The carrier has lost $31.43 of revenue in fuel fluctuation. Carriers are happy to make 7% margins which means they make $70 on a $1,000 load. The $31 on the fuel cuts their margin in half, even though the 500-mile load would probably be priced in the $700-$900 range. This certainly will not help carrier ORs in January as the market is softening and many macro-economic factors, such as a long term government shutdawn, pose threats to the freight market this winter.

About Indices presented in this article

(SONAR: FUELS.USA, FUELS.SAN, FUELS.DAL) Retail to wholesale fuel spread – USA, San Diego, and Dallas – The Retail to wholesale fuel spread measures the difference between retail diesel price and wholesale or rack price in various markets in the U.S. Retail prices include taxes, transportation costs, and retail markup whereas the wholesale price is the going rate to purchase diesel straight from the refinery’s “rack” which includes the cost of crude, production, and overhead.

(About Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week the Sultan of SONAR will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on for future reference.

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Zach Strickland, FW Market Expert & Market Analyst

Zach Strickland, the “Sultan of SONAR,” curates the weekly market update. Zach is also a one of FreightWaves’ Market Experts. With a degree in Finance, Strickland spent the early part of his career in banking before transitioning to transportation in various roles and segments, such as truckload and LTL. He has over 13 years of transportation experience, specializing in data, pricing, and analytics.