Spread Between Retail And Rack Diesel Price Could Compress Carrier Margins In January

FREIGHTWAVES' SONAR CHART OF THE WEEK (Jan 27 -Feb 2, 2019) 

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

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The spread between retail and wholesale fuel prices expand and contract, potentially doing the same to carrier margins FUELS 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, 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.

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, fuel expense for carriers is averaging roughly 4-6% of total revenue.  

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 diesel price by market. The retail price is collected from various truckstops across the country that focus on truck fueling.

As the spread contracts, carriers' margins will do the same. Keeping in mind, the carrier will charge a rate 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

FUELS 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 FreightWaves.com for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry- in real time.

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