Diesel Wholesale-Retail Price Spread Jumped 41% In 2 Months

The average wholesale, or "rack," price for ultra-low sulfur diesel has dropped rapidly over the past two months as crude oil production increases out of the U.S. On October 7, the difference between the rack price and retail price was $0.76/gal. Currently the price differential is $1.28/gal, a 41 percent jump. In a market where fuel prices are falling rapidly carriers have an opportunity to get a temporary boost to their margins.

The spread between diesel cost and retail price has widened rapidly. (SONAR chart of ULSDR.USA and DOE.USA)

Many carriers purchase their fuel at a rate close to the rack price, but they pass along the variable fuel cost at a rate that is tied to the national retail average price that is reported by the DOE every Monday in the form of a fuel surcharge. The fuel surcharge will typically be a rate per mile for truckload carriers that is associated with the average retail price per gallon. An example of this would be if the average retail price is $3.00 per gallon the customer would pay something like $0.31/mile.  In situations where fuel is dropping rapidly carriers can benefit from paying less for fuel than their fuel surcharge is reflecting.

The average retail price takes time to reflect dropping costs as it is reported on a delay. Last week's numbers are reported and used for the current week. Another reason for the delay is the fact the fuel purchased at fueling stations was purchased in an earlier portion of the price drop and takes time to get used. For instance, this week's fuel was purchased two weeks ago when prices were higher.

Depending on the carrier fuel purchase program they can be able to purchase fuel based on the current rack rate without waiting on the retail price drop. The faster the rack rate declines in relation to the retail price the higher their margins will be.

The tradeoff is that when the situation is reversed when rack prices are climbing rapidly, as they did in 2015, carriers will pay higher prices for fuel while the retail rate takes its time catching up, shrinking margins.

The big news this week was the OPEC meeting where they decided to cut oil production 1.2 million barrels per day with 800,000 of that coming from OPEC nations and 400,000 of it coming from non-OPEC nations. This cut in production should stabilize fuel costs and keep the price from falling much further. Most consumers want to see fuel prices fall but the reality is that if the price of oil drops too far then the economy tends to suffer. Wells cannot afford to operate unless the market price will support the cost to draw oil from the wells.

Oil production has become a large part of the U.S. economy. The U.S. has become a net exporter of oil meaning it ships out more oil than it receives. This is good news as it means the U.S. gets foreign dollars placed into its economy. Many other trickle-down effects of oil production exist in the form of raw materials and all the products derived from oil such as plastics.

Transportation is directly impacted by oil production as well with over 300,000 estimated truckloads a week moving back and forth from the oil producing areas to the ports due to pipeline constraints. Carriers will enjoy the nice bump to margins this quarter, but they certainly would rather keep the price of oil high enough to not have any detrimental impact on the economy. The latest decision by OPEC is probably a good thing.

About Indices Presented In This Article

ULSDR Ultra-Low Sulfur Diesel Rack Price - USA - The average national price paid at the "rack" for ultra-low sulfur diesel. The rack price is the wholesale price paid for ULSD. This rate includes the cost of pulling the oil from the well and transporting it to the racks where retailers purchase it. It does not include retail markup and taxes.

DOE Department of Energy average price of diesel fuel - USA - The average national price of diesel fuel paid at the retail level. It includes the cost of production, taxes, and all markups.