A pandemic and oil price war deliver a one-two punch for oil and diesel prices.
Oil prices are known to be volatile, but the roller coaster this year so far has been wilder than ever before. What can we expect for the rest of year, and what does this mean for diesel prices?
Prices breaking records
Between Jan. 9 and Feb. 3, oil prices experienced a daily increase only five times as investors grew concerned about a virus taking hold of China, the world’s second-largest oil consumer. Decreases remained relatively modest. However, once COVID-19 became an inevitability rather than a possibility in the U.S., all hell broke loose.
On Feb. 24, the Dow Jones plummeted by 1,000 points or 3.5%, the largest drop in two years. By Feb. 28, oil prices had nosedived by 13%, the largest weekly decline in more than 11 years. As if COVID-19 did not complicate the situation enough, Saudi Arabia and Russia engaged in an oil price war.
West Texas Intermediate oil prices kicked off the year at more than $61 a barrel. By March 2, prices were just more than $46. A few days later, a deal between Russia and Saudi Arabia collapsed. Consequently, so did oil prices.
On March 6, WTI fell by 10%. The very next trading day, prices fell by $10 or 25% in a single day, the biggest one-day drop since Jan. 17, 1991, during the first Gulf War when prices slid by 33%. Prices rebounded by 10% the next day, but ended the week at $31.73.
That wasn’t even the worst of it. The week of March 16 was a disaster for oil prices. In the first three trading days, oil prices fell by 10%, 6% and 24%, settling at its lowest in 18 years. Relief came on Thursday, March 19, with a 24% increase, the largest one-day percentage climb on record at the time, after some positive news regarding both COVID-19 and the Russia-Saudi price war. But the damage was done. Oil prices dropped by nearly 30% that week alone.
On April 7, the U.S. Energy Information Administration released its updated Short-Term Energy Outlook report. In the report, EIA predicts WTI oil will average just under $30 for the year, a nearly 25% difference from its March forecast of more than $38. For 2021, EIA predicts a jump in prices after the dust has settled with a forecast of $41.12 for next year, a decrease of nearly 20% from March’s report. Comparatively, average WTI prices were $57.02 on average last year and $65.06 on average in 2018.
What does price collapse mean for diesel?
Like any other petroleum product, diesel prices are closely tied to oil prices.
Based on the above data, EIA predicts diesel will average at $2.35 for the year, down from $2.54 predicted a month prior. Next year, EIA foresees average diesel prices of $2.51. In the previous report, EIA’s diesel price prediction for 2021 was $2.73.
Those are drastic one-month changes and significantly lower than predicted before the current pandemic and oil price war situation. For comparison of more “normal” times, take a look at EIA’s December Short-Term Energy Outlook report. At the time, EIA predicted diesel prices for 2020 to be $3.08 and WTI averaging at $55 per barrel, essentially unchanged from the previous month’s report.
Unforeseen circumstances have made EIA’s reports before the current situation seem like the agency just banged on a calculator and inputted the numbers. But that should be the key takeaway: anything can happen.
Right now, oil and diesel prices have plummeted, sending annual predictions on a corresponding downward spiral. However, don’t plan your immediate operations around these low prices. An infinite amount of possibilities can send those prices skyrocketing to record highs in a relatively short amount time. LL