With crude oil prices continuing to hold steady, diesel prices are expected to do the same. But the risk that an unforeseen event could spark volatility remains.
Diesel fuel markets today are very consistent with where they were last year—indeed, the average U.S. diesel price today is almost exactly what it was one year ago. That's no surprise, because crude oil markets also are relatively unchanged. Crude has been, and will continue to be, the dominant factor in determining diesel prices. With the outlook for crude oil prices flat, we can therefore expect diesel prices for the next few years to stay roughly where they have been over the past year.
Figure 1 shows a historical view of retail and wholesale diesel prices compared to the light sweet crude oil price. It demonstrates a market operating close to economists' ideal of "perfect competition": both peaks and valleys are quickly passed on to the pump. No single player has enough market power to alter the ongoing differential among these three lines. And because there has been no significant change in market dynamics over the past year, there's no reason to believe this trend won't continue.
Article Figures
[Figure 1] U.S. diesel price vs. underlying crude price (in US dollars) 1994-presentEnlarge this image
[Figure 2] Light sweet crude oil prices (historical and futures)Enlarge this image
As a result, diesel prices will continue to follow crude prices, which are not expected to fluctuate significantly. Figure 2 shows the value of futures contracts on crude remaining basically flat. Of course, the standard caveat that accompanies this chart is that the futures market may be caught by surprise. A major, unforeseen event (a war, a continued economic crisis, or a natural disaster) could dramatically raise or lower the price of crude, and therefore of diesel.
Be prepared
But let's also apply a caveat to that caveat: Such a huge event would have far more significant impacts on most companies than merely changing the prices they pay for diesel. For example, a price spike prompted by conflict in the Middle East could also cause widespread inflation and reduced consumer buying power that might, among other effects, significantly lower demand for many goods. The best way to prepare for such unpredictable events is not merely to hedge on the price of diesel, but to also have a companywide risk management strategy that considers these and other risk scenarios in a wider context.
Again, such risks represent wildcards. The futures traders, whose job is to predict trends, see any change as unlikely. That's what they said last year, and indeed there has been no significant change. And that's what they're still saying.
The futures traders' opinion may seem surprising in light of increasing domestic crude production. If the United States is producing more crude oil, why wouldn't prices come down? The answer is that current imports amount to almost 9 million barrels per day of crude, complementing 6 million barrels per day of domestic production. Even optimistic outlooks project that U.S. production growth will offset only about half of the current import volumes, so significant levels of imports will continue for the foreseeable future. And in the global crude market, the Organization of Petroleum Exporting Countries (OPEC) nations will continue to hold the balance of supply, so their actions will still exert a significant influence on pricing.
Another common question centers on liquefied natural gas (LNG). Given improvements in LNG engine technology, shouldn't conversions to that fuel reduce demand for diesel, thereby putting downward pressure on prices? The answer is, not enough—at least in the short term. For now, the time lag in rolling out national LNG distribution networks rules it out for passenger-car or cross-country travel; nobody wants to get stuck in the middle of the country hundreds of miles from a refueling station. LNG is likely to make early inroads in local-only fleets, such as taxis and local delivery trucks that regularly return to a central location to refuel. But these incremental increases will not dampen overall demand for diesel. That demand is still expected to grow, and thus prices are not expected to drop.
Throughout this analysis, we are looking at a "big picture," aggregate perspective. In any given local market, on any given day, prices may fluctuate. Developments such as significant weather events or unplanned refinery outages may cause temporary shortages, increasing prices until the system can adjust. But the outlook is that the system will indeed adjust, and that temporary, local fluctuations will even out in the longer term.
In summary, current trends pose no imminent threats or promises for the diesel market, and supply chain managers can expect few changes again this coming year.
Confronted with the closed ports, most companies can either route their imports to standard East Coast destinations and wait for the strike to clear, or else re-route those containers to West Coast sites, incurring a three week delay for extra sailing time plus another week required to truck those goods back east, Ron said in an interview at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
However, Uber Freight says its latest platform updates offer a series of mitigation options, including alternative routings, pre-booked allocation and volume during peak season, and providing daily visibility reports on shipments impacted by routings via U.S. east and gulf coast ports. And Ron said the company can also leverage its pool of some 2.3 million truck drivers who have downloaded its smartphone app, targeting them with freight hauling opportunities in the affected regions by pricing those loads “appropriately” through its surge-pricing model.
“If this [strike] continues a month, we will see severe disruptions,” Ron said. “So we can offer them alternatives. We say, if one door is closed, we can open another door? But even with that, there are no magic solutions.”
Turning around a failing warehouse operation demands a similar methodology to how emergency room doctors triage troubled patients at the hospital, a speaker said today in a session at the Council of Supply Chain Management Professionals (CSCMP)’s EDGE Conference in Nashville.
There are many reasons that a warehouse might start to miss its targets, such as a sudden volume increase or a new IT system implementation gone wrong, said Adri McCaskill, general manager for iPlan’s Warehouse Management business unit. But whatever the cause, the basic rescue strategy is the same: “Just like medicine, you do triage,” she said. “The most life-threatening problem we try to solve first. And only then, once we’ve stopped the bleeding, we can move on.”
In McCaskill’s comparison, just as a doctor might have to break some ribs through energetic CPR to get a patient’s heart beating again, a failing warehouse might need to recover by “breaking some ribs” in a business sense, such as making management changes or stock write-downs.
Once the business has made some stopgap solutions to “stop the bleeding,” it can proceed to a disciplined recovery, she said. And to reach their final goal, managers can use the classic tools of people, process, and technology to improve what she called the three most important key performance indicators (KPIs): on time in full (OTIF), inventory accuracy, and staff turnover.
CSCMP EDGE attendees gathered Tuesday afternoon for an update and outlook on the truckload (TL) market, which is on the upswing following the longest down cycle in recorded history. Kevin Adamik of RXO (formerly Coyote Logistics), offered an overview of truckload market cycles, highlighting major trends from the recent freight recession and providing an update on where the TL cycle is now.
EDGE 2024, sponsored by the Council of Supply Chain Management Professionals (CSCMP), is taking place this week in Nashville.
Citing data from the Coyote Curve index (which measures year-over-year changes in spot market rates) and other sources, Adamik outlined the dynamics of the TL market. He explained that the last cycle—which lasted from about 2019 to 2024—was longer than the typical three to four-year market cycle, marked by volatile conditions spurred by the Covid-19 pandemic. That cycle is behind us now, he said, adding that the market has reached equilibrium and is headed toward an inflationary environment.
Adamik also told attendees that he expects the new TL cycle to be marked by far less volatility, with a return to more typical conditions. And he offered a slate of supply and demand trends to note as the industry moves into the new cycle.
Supply trends include:
Carrier operating authorities are declining;
Employment in the trucking industry is declining;
Private fleets have expanded, but the expansion has stopped;
Truckload orders are falling.
Demand trends include:
Consumer spending is stable, but is still more service-centric and less goods-intensive;
After a steep decline, imports are on the rise;
Freight volumes have been sluggish but are showing signs of life.
CSCMP EDGE runs through Wednesday, October 2, at Nashville’s Gaylord Opryland Hotel & Resort.
The relationship between shippers and third-party logistics services providers (3PLs) is at the core of successful supply chain management—so getting that relationship right is vital. A panel of industry experts from both sides of the aisle weighed in on what it takes to create strong 3PL/shipper partnerships on day two of the CSCMP EDGE conference, being held this week in Nashville.
Trust, empathy, and transparency ranked high on the list of key elements required for success in all aspects of the partnership, but there are some specifics for each step of the journey. The panel recommended a handful of actions that should take place early on, including:
Establish relationships.
For 3PLs, understand and get to the heart of the shipper’s data.
Also for 3PLs: Understand the shipper’s reason for outsourcing to a 3PL, along with the shipper’s ultimate goals.
Understand company cultures and be sure they align.
Nurture long-term relationships with good communication.
For shippers, be transparent so that the 3PL fully understands your business.
And there are also some “non-negotiables” when it comes to managing the relationship:
3PLs must demonstrate their commitment to engaging with the shipper’s personnel.
3PLs must also demonstrate their commitment to process discipline, continuous improvement, and innovation.
Shippers should ensure that they understand the 3PL’s demonstrated implementation capabilities—ask to visit established clients.
Trust—which takes longer to establish than both sides may expect.
EDGE 2024 is sponsored by the Council of Supply Chain Management Professionals (CSCMP) and runs through Wednesday, October 2, at the Gaylord Opryland Resort & Convention Center in Nashville.
While the Council of Supply Chain Management Professionals' 2024 EDGE Conference & Exhibition is coming to a close on Wednesday, October 2, in Nashville, Tennessee, mark your calendars for next year's premier supply chain event.
The 2025 conference will take place in National Harbor, Maryland. To register for next year's event—and take advantage of an early-bird discount of $600**—visit https://www.cscmpedge.org/website/62261/edge-2025/.
**EDGE EARLY BIRD Terms & Conditions: Promotion is for the EDGE 2025 conference in National Harbor, Maryland. Offer valid for Premier and Basic Members only. Offer excludes Student, Young Professional, Educator, and Corporate registration types. Offer limited to one per customer. Offer is not retroactive and may not be combined with other offers. Offer is nontransferable and may not be resold. Valid through October 31, 2024.