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Might be time to hedge against higher diesel prices

It may be time to revisit diesel options as an alternative to fuel surcharges.

 That was a key takeaway from an August 26 presentation by Alan Levine, chairman and chief executive officer of Powerhouse. A petroleum industry specialist, he delivered the Fuels & Supply Market Update during the fifth Annual DeliveryONE Expo in Denver CO. The conference is sponsored by Mansfield Energy Corp.

 Levine said there is enough uncertainty in the market right to suggest that fuel hedges would be a good risk management strategy to protect against quickly rising diesel prices. Options give a truck fleet an opportunity to buy diesel futures at a fixed price in advance of fuel increases that could occur in coming months.

 Levine said he has concerns about fuel prices in coming months for a number of reasons. First of all fuel futures are trading in a very narrow range that has led to complacency in the market. 

US crude oil output continues to grow (it’s at roughly 8.5 million barrels a day now), but US demand for crude oil remains at 18 million to 20 million barrels a day. US refineries are running full out, but refined product stockpiles are low. Levine cautioned that US refineries cannot keep operating at current levels indefinitely.

 “Recent projections suggest we may be facing another cold winter in the United States, which will put more pressure on US petroleum supplies,” he said.

 In spite of tight US supplies, US refiners continue to export more refined product, especially distillates, such as diesel. “Refining capacity is shrinking in the Atlantic basin, and Europe is relying more on US fuel exports,” Levine says. “We’re also sending a considerable amount of product to Latin America. OPEC (Organization of Petroleum Exporting Countries) outages are becoming a serious concern.”

 In the face of the uncertainty, crude oil prices have been rising. All of this suggests a period of change in the fuel markets, and fleets need to be prepared.

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