Day: January 24, 2017

Diesel Prices for 2017

Current Situation

Diesel prices the last two years have behaved much differently than they did a few years ago. Diesel prices used to peak in the spring and fall and were at their lowest in January and February. For the last two years, diesel prices have either increased or decreased the majority of the year. Also, from 2012 through 2015, highway diesel prices were much higher than they were in 2015 and 2016. Whether fracking is the cause or if there is some other factor in play, pricing patterns have been noticeably different these past two years.

Figure 1 below show the highway diesel prices by week for the last five years. The last two years have seen prices move in opposite directions. During 2015, prices declined nearly the entire year. The decline actually started during the fall of 2014 and continued through February of 2016. During most of 2016, diesel prices continued their slow rise.

Figure 1. 5 Year Weekly Highway Diesel Prices

Although diesel prices ended 2016 at their high point for the year, prices are still low when looking at a five year history of diesel prices. The question for farmers is what are diesel prices going to do in 2017. With grain prices low, farmers will really need to watch their expenses closely.

When to Purchase Diesel Fuel

There are two questions to address. First when might be the best opportunity to purchase diesel fuel during the year and what might happen to prices during the course of 2017. To answer the first question, the seasonality of diesel prices might provide some guidance. The seasonality of diesel prices is shown in Figure 2. Here, the monthly price is compared to the average yearly price to determine the difference. The last five years of monthly diesel prices were then averaged by month to get a monthly seasonal price difference. The black bar is this average while the purple points are the seasonal differences in a given year.

Figure 2. Monthly Seasonality of Diesel Prices

As shown in the figure, March tends to have the highest price in a given year that typically is $0.10 higher than the yearly average price. In four of the last five years, the March diesel price has been above average. The exception being last year when March had nearly the lowest price of the year.

From a farmer perspective, high prices just before spring planting could present problems. If farmers are filling their tanks at that point, they could be paying more than necessary. Farmers would likely pay less for diesel by filling their diesel tanks at the end of the year.

December has the lowest price of the year on average although there is a wide variation in the December seasonality. In 2016, Diesel prices were actually the highest in December. Still, in four of the last five years, December diesel prices were either near the yearly average or below the average.

August is an interesting month for diesel prices as this month’s seasonality shows very little seasonality. In all of the past five years, the August diesel price has been nearly the yearly average price.

Price Predictions for 2017

As might be expected, diesel prices and oil prices are highly correlated. Using the last three years of weekly oil and diesel prices we can develop a model that estimates diesel prices as a function of oil prices. The future oil prices can then be used to gauge where traders think diesel prices are headed.

The model used in this analysis predicts a $0.27 increase in diesel price for a $10 increase in oil price. The current crude oil futures quotes for the rest of 2017 peak at $56. This is $4 above the December oil price. Thus, diesel prices could rise another $0.10 during 2017. Of course this price projection assumes no big shocks to the market occurring. If this projection is accurate then farmers could expect higher prices in 2017 when compared to 2016. Still diesel prices would be below where they where from 2012 through 2014.

Gasoline Prices for 2017

Current Situation

Gasoline prices the last two years have been much lower than they were in the three preceding years. Gasoline prices typically follow a seasonality pattern where prices peak in the summer time and are lower in the winter time. These seasonality patterns corresponding to typically higher demand as many consumers in the U.S. are traveling.

Despite lower gasoline prices the last two years, prices still followed the basic seasonality pattern although prices in 2016 didn’t change much during the year. As explained in AgManager.info publication GI-2017.1, diesel prices were also lower the last two years but the seasonality patter was not consistent. Thus the changes that have occurred over the last two years seem to be affecting diesel differently than gasoline.

Figure 1 below shows the gasoline prices by week for the last five years. Consumers were likely very happy with gasoline prices in 2016 as this was the lowest price year in a long time and prices did not fluctuate much at all during the year. In many places, consumers saw gasoline below $2 a gallon for at least some parts of the year.

Figure 1. 5 Year History of Gasoline Prices

A bigger concern going forward though is what do these low prices mean for oil production. There is some evidence that from 1994 to 2014 there was a rightward shift in the supply curve (http://oilprice.com/Energy/Crude-Oil/The-2014-Oil-Price-Crash-Explained.html ) which has led to lower prices. However, low prices certainly do not encourage more drilling of oil and could actually lead to the supply curve moving back to the left if oil producers profits are so low that producers shut down production. Oil demand and oil supply are inelastic so any shifting of the supply curve results in big price changes. Boom and bust cycles are not that unusual in the oil business so consumers should not be all that surprised when gasoline and diesel prices change rapidly.

Seasonality

As mentioned above, gasoline shows a strong seasonality pattern where prices are higher in the summer. The seasonality pattern is much stronger than it is for diesel fuel. Typically, gas prices will reach their peak in May or June (see Figure 2). Most farmers don’t use enough gasoline and gasoline doesn’t store as well as diesel either to take advantage of this price seasonality.

Figure 2. Seasonality of Gasoline Prices

Price Predictions for 2017

Just like for diesel fuel, the price of gasoline is closely tied to the price of oil. As shown in AgManager publication GI-2017.1, oil prices are expected by traders to reach $56 this summer. That would add another $0.08 to the price of a gallon on gasoline. Thus, gasoline could be slightly more expensive in 2017 when compared to 2016 but still likely below the levels from 2012 to 2014. Again, any shocks to the market could change prices dramatically.