A feud over oil prices between Saudi Arabia and Russia that began in early March, combined with a decrease in demand as a result of the global COVID-19 pandemic, has caused crude oil prices around the world to plummet. This has led to lower diesel prices at the pump for fleets in recent weeks – a trend that experts say is likely to continue in the coming months.
Though cheaper diesel obviously helps fleets relative to operating costs, depressed crude prices could eat into already-sluggish freight in the oil sector, which analysts say account for about 3-5% of all truck freight. Likewise, cheaper fuel could further depress Class 8 truck orders already expected to hit their worst points since the Great Recession over a decade ago.
“The drive for fuel efficiency and the advances in technology are some of the crowning achievements of truck OEMs,” says Jim Meil of ACT research. “It’s great to see trucks get mileage that was unthinkable even 10 years ago with 8.5 mpg and higher in some cases. But that’s a bigger benefit when diesel is $4 or higher rather than $2.75 and lower. Fuel efficiency is one of the advantages the industry uses to put buyers in trucks, and with lower fuel prices, that advantage goes away.”
Also, though freight in the oil sector of the U.S. economy isn’t “dominant like over-the-road freight…it’s still significant,” he says. “You hate to have any sector exposed to difficult times.”
As of Tuesday afternoon, the West Texas Intermediate price (one of the global benchmarks for crude oil prices), was around $24 a barrel. The other global crude oil benchmark, Brent crude, averaged $32 a barrel in March, down from February’s $56 average, according to the Department of Energy’s Energy Information Administration. EIA, in its monthly Short-Term Energy Outlook report, projects Brent crude prices will average $33 a barrel in 2020, down from an average of $64 a barrel in 2019.
Diesel prices have been on the decline since mid-January, falling by more than 50 cents over the last 13 weeks. EIA reported a national average of $2.55 per gallon of on-highway diesel during the week ending Monday, April 6.
The global spread of the COVID-19 coronavirus also helped propel the decreases through February. However, says Meil, the start of a spat between Saudi Arabia and Russia on March 8 has been the primary driver of cheaper oil prices.
Meil notes that on Feb. 19, WTI crude was at $53 a barrel, which was before the coronavirus began to spread in the U.S., as well as before the Saudi Arabia-Russia disagreement. A month later, on March 20, WTI prices had fallen to around $19.50 a barrel.
“Oil prices have been floating around that pretty much continuously from the 20th of March until [April 3] with a step up to $24,” Meil says.
Sean Hill, an industry economist with EIA, says the steep drop in demand for oil — due to stalling economies caused by coronavirus lockdowns — coupled with “the inconveniently-timed ‘price war’ occurring between the larger global oil producers” has driven oil prices, and in turn retail fuel prices, down.
“Where we are at now, with historically low oil prices, I’m not sure anyone thinks that policy is really sustainable, but we’ll see,” he says. “We’re still fairly early on in this environment as it relates to seeing actual data of impacts and having any idea how long this persists.”
EIA projects U.S. gasoline prices will reach near 20-year lows in the second quarter of 2020. But diesel prices likely won’t fall as far as gasoline, EIA predicts, given a higher demand for diesel with truck drivers still on the road making deliveries. The report projects diesel prices to average around $2 a gallon in the second and third quarters of 2020.