Fuel costs were supposed to be one of the major headwinds for carriers entering 2020. Implementation of the new low sulfur requirements—IMO 2020—on marine fuel were supposed to deplete diesel inventories dramatically, putting upward pressure on the price of diesel, the main fuel for heavy duty class 8 trucks that move freight. So far, the opposite has occurred with wholesale diesel prices plummeting almost $0.40/gal in January, while retail prices have been slow to follow—dropping just $0.12/gal. This should give carriers some needed cost relief in the slower first quarter of 2020.
Earlier this month, award winning energy market journalist, John Kingston, wrote about why the price has not increased as anticipated. With the domestic trucking market experiencing its typical winter lull as spot rates fall rapidly from the holiday peak, the spread between rack or wholesale price of low sulfur diesel and retail jumped above a $1.20/gal for the first time since January 2019, lowering many carriers’ fuel costs in relation to fuel revenues.
The reason the spread between wholesale and retail diesel price is important for trucking operators is due to the fact many carriers buy fuel off the rack —or at some derivative of the rack price—and charge their customers based on retail price. “Rack” is the term used for the facility where refineries hold the oil prior to distribution, normally picked up by a tanker truck.
The charge carriers pass along in the form of a fuel surcharge is based on the average retail price in most cases, which is reported by the Department of Energy (DOE) every Monday. When these two values diverge—as they have been doing—carriers get the added benefit in the form of decreased net fuel expense (fuel costs less fuel surcharge revenue).
These fuel surcharges, at least for truckload carriers, do not necessarily recover the entire cost of fuel. They are designed to offset the volatility of the price of fuel, which is why they are based on the average retail price, a transparent publicly available figure.
Truckload carriers normally have a sliding scale that increases or decreases the fuel surcharge for every $0.03 to $0.05/gal movement in the retail price reported by the DOE. Retail prices are slow to adjust to the wholesale price and are far less volatile due to hedging and inventory management by the retail providers.
In other words, the fuel surcharge is sticking at a higher level due to the slow decline of the reported retail average, while those who buy off the rack are getting the benefit of rapidly falling prices—costs are declining faster than revenues.
Rack prices are heavily influenced by speculation on the futures market and the price of crude, which has been falling rapidly after peaking in early January, ironic since this is when the new regulations for marine fuel were implemented.
Maritime Fuel Gets Debunked
Diesel is a distillate, which along with other fuels like jet fuel and kerosene are derived from processing crude oil. There are variances of crude oil that lend themselves better to distilling one fuel over another. The marine or “bunker” fuel is no longer allowed for the container ships. Bunker fuel is a heavy fuel that could be made from higher sulfur containing “sour” crude. “Sweet” crude contains less than 0.5% sulfur and is easier to distill into diesel.
In order to mitigate the potential increase of fuel costs many maritime shipping lines have been retrofitting container ships with “scrubbers”, which are designed to clean the exhaust fumes of pollutants, but there are problems associated with this and not all ships have been equipped.
Now that the container ships are required to use a lower sulfur fuel, there is more pressure on low-sulfur diesel inventories. There are still many who think diesel prices will expand later in the year, which will have the opposite impact to carriers’ bottom line.
Want to get a jump on diesel prices? FreightWaves has developed next day price of diesel that will tell you what the rack price of diesel will be tomorrow, which could save thousands in fuel costs. Learn more here.
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