An Interesting Summer'

DTN predicts more volatility on both supply, demand sides

Steve Dwyer, CSP Reporter

OMAHA -- Terminal operators, marketers and retailers should brace for more volatility in the fuel market,on both the supply and demand side of the coin. This projection was delivered Tuesday by executives with Omaha-based DTN during the energy and agricultural business information services provider's Fuel Markets Outlook & Strategies web seminar.

In discussing supply and demand balances, production issues and price outlooks, Brian Milne, DTN's refined fuels editor, said terminal operators have their work cut out for them in the coming year surrounding market conditions. Milne said [image-nocss] price and supply volatility, combined with the threat of lower demand, all will affect terminal operators significantly.

In discussing diesel fuel prices, which reached $4 per gallon in recent weeks on the East Coast, Milne said fluctuations of retail diesel prices are closely aligned with economic growth. Over-the-road transportation represents a key factor to the state of the economy; thus, when diesel fuel prices reach higher thresholds, it "creates havoc for the trucking industry, and the industry can't pass along these costs," said Milne. He said the travel center industry recently announced layoffs stemming from the high diesel costs.

Click hereto read CSP Daily News coverage of TravelCenter of America workforce reductions, announced last week.

Milne said as refiners shift from producing winter grade to summer grade fuel, the industry must be wary of supply disruptions that lay in wait. Overall, in looking at refining efficiency and "run rates," Milne said last June a significant incidence of refinery maintenance programs led to supply outages, creating market supply shortages. In looking ahead to this summer, he stated that lower refining run rates could tighten gasoline supplies once again and make "the supply chain vulnerable" at a time when market duress is more intense than it was last year.

Heating oil prices were not exempt from overall market volatility. Milne said heating oil price spikes occurred this winter, particularly led by prevailing frigid temperatures along the East Coast.

Darin Quest, DTN's product management specialist, said terminal operators should brace for "an interesting summer." In discussing strategies to optimally manage a mercurial fuel marketplace, Quest said suppliers—from both buy and sell positions—must have a firmer handle on managing what's become an onerous credit environment. With credit limits encroaching upon many business people, a terminal operator, for instance, must be ever-cognizant of his own and his customers' credit situations, and make smarter buying and selling decisions.

To foster operational efficiency, company decision-makers need to identify the proper tools to implement lower-cost structures. This, said Quest, means adoption of automated backoffice transaction solutions to streamline processing and avoid processing errors in buying and selling of fuel. Quest said that in a low-demand fuel market, the onus is on terminal managers to more closely track where they stand in relation to competitors to capture optimal price and margin positions. This task is even more imperative with the credit crunch looming.

Also, Milne said merger and acquisition activity in the independent petroleum marketing sector recognizes that "some businesses are in jeopardy. If these distressed jobbers do not have the wherewithal to withstand market conditions," it could make them ripe to be acquisition targets.

DTN also delivered a prognosis on the state of renewable fuels—ethanol and biodiesel. Milne said the national renewable fuels law will see significant expansion of both of these fuels. He said ethanol will displace some gasoline supply and that, undoubtedly, gasoline in the long-term is "under threat from ethanol."

Ethanol supply is tied to the number of plants that are expected to go on line this year (some have the number pegged around 74) and into 2009. Milne added that the proposed relaxation of U.S. tariffs on ethanol produced in countries such as Brazil would allow additional volume to flow more freely into the United States.

As for biodiesel, Milne said it will take a while for this fuel to attain a "discount position." Biodiesel is experiencing a great deal of pressure due to enormous feedstock costs, he said, and this is occurring even as blenders are eligible for a $1-per-gallon credit.