Diesel Prices Are Rising But Will Likely Fall After Christmas

Diesel Prices Are Rising But Will Likely Fall After Christmas

An aerial view of one of Chevron’s Permian operations. Chevron An aerial view of one of Chevron’s Permian operations.

The average retail price for diesel fuel in the U.S. has risen about two cents per gallon this week. Meanwhile, diesel vehicle owners/drivers are being told to expect the trend of high prices to continue through Christmas, unless unexpected overseas supply developments intervene.

The average price of diesel is currently around $3.226 a gallon, which mirrors the current robust price strength for domestic and foreign crude oil. School districts largely pay wholesale prices, but those figures continue to rise, and will likely continue to for the remainder of 2018. So where does that leave student transporters who must budget for or purchase diesel this year?

Delay Major Purchases If Possible

My suggestion is to try to hold off as much as possible on any purchases for calendar year 2018—unless of course, something drastic suddenly happens in the national news that would slash prices. Otherwise, if you are anticipating signing a contract sometime this year, you are going to be doing so during a historic high in diesel prices. At least if you can delay any purchases until January, the odds are that you will likely catch a temporary price drop after the busy holiday season, or perhaps in mid-October. If you have to buy fuel before Christmas, make those purchases as small as possible, in order to temporarily tide you over until January or later.

If this looks and feels like a game of “Budget Roulette,” where you may be gambling more than you ever wanted to—at least you won’t be alone. The timing of your major fuel contracts, or spot purchases, will be crucial for the next four months. If you can somehow delay that one huge fuel purchase until after Christmas, there are increasing signs that you will be financially rewarded for your patience and wisdom.

And don’t panic or be stampeded into making a large, rash, fuel purchase. My advice: Get by this year, because help is on the way in 2019. The Permians (fields, that is) have been unleased and are literally on the way to the marketplace, which will bring freedom from the current pain of high prices.

Increasing Oil Production from the Permian Fields May Be Unstoppable

Of course, every school district’s situation is probably unique and filled with other factors. But an important strategy may be worth keeping in your back pocket. With the Permian shale oil fields in Texas and New Mexico continuing to set output records almost every month this year. Unfortunately, the capacity of existing oil pipelines continues to max-out until new ones under construction are finally completed in a year or so. Fortune magazine on May 25 referred to that fracking region as “a gusher of production growth [that is] epic even by the outsize standards of the Lone Star State.” 

chevron permian basin 1Part of Chevron’s Permian Basin operations.

And in another unexpected twist, Oilprice.com said today, Aug 30, that, “As shale oil production technology has increased, so has the productivity of the wells. As a result, new wells are more productive than older wells, as new techniques are able to extract more oil out of them.” Aaahhhhhh yes, ya gotta love home-grown technologies at times like this, especially when you know it’s going to save everyone (especially school districts and property tax payers) tons of money. Or, I should say, barrels of money.

Leave it to American businesses to constantly squeeze more out of an already improving situation: “The pipeline capacity out of the Permian basin is becoming fully utilized with no spare capacity available to handle increasing production. Other means of transportation, by rail for example, are being employed, but are more cumbersome and expensive,” said Oilprice.com. In other words, when the use of expensive tanker trucks and rail cars slackens, the total transportation expenses for oil companies will fall sharply, and with it, prices of all types of oil products.

In another news item that helps support my position, on Aug. 23, 2018, the U.S. Energy Information Administration (EIA) commented on its authoritative monthly Short-Term Energy Outlook publication, “that U.S. crude oil production will average 10.7 million barrels per day (b/d) in 2018 and 11.7 million b/d in 2019. If realized, both of these forecast levels would surpass the previous record of 9.6 million b/d set in 1970. This national increase is almost entirely driven by tight oil. In particular, the Permian region ... is expected to account for more than half of the growth in crude oil production through 2019.”

As if that picture wasn’t good enough, the EIA added that it, “expects the Bakken region to hit record-high production in 2018, averaging 1.3 million b/d and growing to 1.4 million b/d in 2019.” The Bakken region is huge, covering 200,000 square miles in North Dakota and Montana, EIA reports.

The headline on June 15 in the local Midland Reporter in Texas seemed to say it all, “Permian expected to experience ‘stunning’ growth.” Extraordinary production gains were once again detailed: “Permian Basin oil production will rise by nearly 3 million barrels a day by 2023, exceeding most recent estimates and comprising more than 60 percent of the globe’s net oil production growth, according to a report from IHS Markit. The Permian’s expected total oil production of 5.4 million barrels will not only exceed Kuwait’s current production but will be more than the total production of any OPEC member other than Saudi Arabia, IHS said. According to the report, that growth will be driven by nearly 41,000 new wells and $308 billion in upstream spending.”

Forbes magazine was also bullish on its forecasts, noting that by the end of 2018, “Despite the bottlenecks, ‘Permian oil production is projected to almost double again to 5.3 million b/d from 2017 by the end of 2020, according to Morningstar,’ perhaps crushing OPEC’s dreams.”

Aren’t you so sad about OPEC’s future dreams likely coming to an end? 

The Additional Oil Pipelines Factor

When those additional oil pipelines out of Texas begin coming online and production levels jump every month, you heard it here first folks. You are going to witness an international pricing panic inside OPEC that members won’t be able to stop. Incredible as it may sound, the Permian basin is already No. 4 in oil production worldwide—behind only Saudi Arabia, Iran and Iraq. By the end of 2019, several additional major capacity pipelines will have begun operations and there will be a corresponding drop in oil prices. The oil marketplace will be swelling with too much oil for levels of demand at that future time, which will force prices down to around $50 a barrel. It could also likely fall to $47 to $49 by Christmas 2019.

chevron permian basin 2
View from above part of Chevron’s Permian Basin facilities in Texas.

That’s my first prediction for 2019. You can have a little fun by bookmarking this blog and rereading it a year from now, to see how close this column will be to that estimate. My other prediction is that the completion of the first batch of new Texas pipelines will cause the Permian basin to take over the No. 1 position in oil production worldwide.

The genuine strength of the economic force of too much supply in the marketplace will finally emerge by yearend 2019. The huge volume of new Permian oil will overwhelm OPEC’s desperate attempts to stop the ocean of Texas oil from topping the dykes. And with it, OPEC’s iron grip on the energy market for the past half-century, will steadily dissolve like the sand under OPEC’s foundation. OPEC’s dominance and clout will be nothing like it was during the Carter administration.

In a similar manner to how the gigantic capability of the American manufacturing machine swung the tide of World War II in only two short years, so too, will the increased Texas oil production come to dominate the world oil market by the beginning of 2020.

Current Price Range is Only Temporary

One traditional key indicator, the price of Brent crude oil that is pumped from Texas wells, peaked this week at above $77 per barrel ($77.85 on Aug. 30). It even remained above $70 for all of August, compared to approximately $52 during August 2017. That’s a $25 per barrel difference from one year ago, and a $10 difference from the beginning of this year. In addition, prices have continuously remained above $70 for the five-month period starting in April.

Internationally, OPEC prices topped $74 several days ago, to $74.48 on Aug. 30 for the “OPEC Basket,” having risen from $69 in just the past two weeks and $49 from exactly one year ago.

Then there is the interesting comment that appeared in Marketwatch.com on Sept. 5, 2018, that OPEC, “whose de facto leader is Saudi Arabia, and Russia, agreed in late June to begin ramping up crude production after more than a year of holding back output. A Bloomberg survey this week showed that OPEC output rose in August to 32.74 million barrels a day—the highest level this year—up 420,000 barrels a day from July,” wrote commodities reporter Myra Saefong.

Expect Prices to Range $5 to $6

Whether you look at domestic or overseas oil production, one conclusion you might reach is that oil and diesel fuel prices will likely continue selling around current prices for the remainder of the year. Brent oil is also expected to fluctuate within a range of about $70 to $82 for the rest of 2018, with OPEC oil selling between $68 to $80.

What-If Factors

That’s one opinion, but if you review the pricing charts for the past year, you will likely also conclude that diesel fuel prices will remain steadily above $3.10 per gallon through the end of the year. That is, unless the Straits of Hormuz are blockaded and prices immediately jump, or there are more new oil field discoveries in Texas, like there have been for the past few years. Those developments would force prices of all petroleum products lower.

Then there are the one-off surprise incidents that would quickly cut all types of oil prices by $10 to $20 per barrel before Christmas. For example, President Trump in July repeated his threat from May 2017 to sell off half of the world’s largest emergency supply of oil, the U.S. Strategic Petroleum Reserve, to reduce the national debt. That resource has the capacity to hold up to 727 million barrels (the SPR currently holds about 660 million barrels), and has been used periodically (and effectively) over the past two years to force gasoline and oil prices down, following Hurricane Harvey, for example.

Hurricane Katrina triggered a release from the reserve in 2005, as did Operation Desert Storm in Iraq in 1991.

With the nation’s economy humming along at a 4.2 percent growth rate (as of Aug. 29, 2018), 3.9 percent unemployment, and lower fuel prices expected for 2019, there are some great things to look forward to economically.

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UPDATE — SEPT. 7, 2018 — EXCERPTS OF A PRESS RELEASE FROM THE U.S. DEPT. OF THE INTERIOR

They Said It Couldn’t Be Done: Trump Admin Dominates with Billion-dollar Oil and Gas Sale

SEPT. 6, 2018 — WASHINGTON — In a testament to the Trump Administration’s America First Energy Plan, the Bureau of Land Management’s (BLM) third-quarter oil and gas lease sale in New Mexico broke all previous records by grossing nearly $1 billion in bonus bids for 142 parcels. The two-day sale brought in more revenue than all BLM oil and gas sales in 2017 combined, and surpassed BLM’s previous best sales year. Revenue from the sale totaled $972,483,619.50....

The two-day, online sale of parcels in the Carlsbad Field Office, located in southeastern New Mexico, easily outpaced what used to be the BLM’s largest sales year ever in 2008, which generated $408,631,537. Illustrating the robustness of the sale, 71 parcels (28,036 acres) were sold on day one, for total receipts of almost $386 million—more revenue than all BLM oil and gas leases sales combined in 2017, which was approximately $358 million.

In addition to the record total bonus bids, the first day of the sale also resulted in a national record for the highest bid for a single parcel, and the highest per-acre bid ever placed. The winning bid for a 1,240-acre parcel in Eddy County was $81,889 per acre, bringing in more than $101.5 million. The winning bid for a 1,240-acre parcel in Eddy County was $81,889 per acre, bringing in more than $101.5 million....

Forty-eight percent of the revenue from lease sales goes to the state where the oil and gas activity is occurring, while the rest goes to the U.S. Treasury. If the leases result in producing oil or gas wells, revenue from royalties based on production are also shared with the state....

US Geological Survey Energy Resources Program 4
Oil extraction operations in the Permian Basin region in Texas have quickly become a historic event. US Geological Survey Energy Resources Program photo.

US Geological Survey Energy Resources Program 3In a period of only a few years, fracking has muscled Texas and the US into the top 5 tier of oil producers worldwide. US Geological Survey Energy Resources Program photo.

US Geological Survey Energy Resources Program 2Water sourcing, usage and disposal after fracking procedures have become a major challenge for oil producers. US Geological Survey Energy Resources Program photo.

US Geological Survey Energy Resources Program 1A Permian Basin drilling operation. USGS Energy Resources Program photo.

Last modified onWednesday, 12 September 2018 17:16