What’s in store for oil and diesel prices in 2018?

January 19, 2018

Tyson Fisher

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On Monday, Jan. 15, average diesel prices hit above $3 for the first time in three years, according to the U.S. Energy Information Administration’s numbers. Is this indicative of what is in store for 2018, or can drivers expect diesel prices to stabilize or drop below the $3 benchmark?

Past and present
As of Jan. 15, national average diesel prices increased by 44.3 cents year to date, according to EIA’s calculations. Similar increases are seen throughout most of the regions. Prices in the West Coast less California region experienced the smallest increase at 34.3 cents, followed by the Gulf Coast region with a 39.6-cent increase.

The major outlier is the California region, where prices at the pump skyrocketed by more than 70 cents. This is mostly due to the fuel tax increase that went into effect this year, increasing the gasoline excise taxes by 12 cents and diesel excise taxes by 20 cents. Diesel prices in the West Coast region also saw a higher-than-average increase of 54.6 cents.

Numbers from ProMiles and TruckMiles reveal a similar upward trend. From the beginning of 2017 to the beginning of 2018, diesel jumped nearly 40 cents, according to TruckMiles. On Jan. 3, 2017, nearly every state in the contiguous U.S. was below $3. However, on Jan. 3 of this year half of contiguous U.S. states were reporting average diesel prices above $3.

Meanwhiles, ProMiles’ numbers practically mirror EIA’s with a yearly increase of 43.6 cents. Regions with below-average increases and significantly higher increases are the same as EIA’s.

Over at AAA, prices were still below $3 on Friday. AAA average diesel prices have increased by 40 cents compared to a year ago.

Diesel price projections for 2018
It is pretty clear which direction diesel prices are going: up. The question is how much will diesel go up? Are we about where we will be throughout the year or can we see prices approaching 2014 levels of nearly $4?

A 2018 Fuel Outlook report from GasBuddy looks promising for those wanting relatively low prices. According to the report, diesel prices will peak in January at an average of $2.86, reaching a low of $2.59 in July and steadily increasing to $2.84 in December. The yearly average comes out to $2.70, according to GasBuddy.

Although Oil Price Information Service’s 2018 Outlook Forecast report did not provide specific price projections for diesel, it did provide price ranges for gasoline and a deep oil analysis as it pertains to diesel.

According to OPIS, the national daily average for gasoline since 2011 peaked at $3.607 in 2012. Prices consistently dropped since then up until last year. By 2016, gasoline daily averages sank to $2.123 before climbing to $2.39 in 2017, an increase of 26.7 cents. Comparatively, EIA’s year-to-date gasoline difference at the beginning of 2017 was nearly 40 cents. OPIS is predicting the gasoline prices will continue to go upward, but at a more modest increase of approximately 6 cents.

If diesel maintains a similar pattern, then OPIS’s outlook appears to be similar to GasBuddy’s projections. In other words, expect an overall increase in diesel prices this year, but not much.

Volatility of oil and fuel prices
All these projections assume nothing crazy happens. Several factors can send prices skyrocketing or plummeting, including extreme weather and geopolitics.

Although Brent oil prices temporarily reached $70 in January, OPIS does not see this as a sign of things to come.

“Financial pundits purveyed predictions of $70 (per barrel) or even $80 (per barrel) oil in the last quarter of 2017, but the rhetoric appears hyperbolic or reflective of wishful thinking among investors,” OPIS’s reports explains. “Numbers in those deciles may indeed return within the decade, but current fundamentals and money flow suggest these quotable targets reflect irrational exuberance by the unseasoned prophets.”

OPIS’s predictions consider “plenty of noise but no constitutional crisis in the U.S.” and no new wars or regime collapses. OPIS also allows room for some disruptions in oil-producing countries like Nigeria, Libya and Venezuela, but without new revolutions or governments. With that said, any significant world or U.S. event can affect oil prices and consequently, fuel prices. By how much and for how long requires a crystal ball.

As both OPIS and GasBuddy point out in their reports, gasoline and diesel are just-in-time commodities. Meaning, retailers do not have a stockpile of fuel like a department store has a surplus of items to sell. Despite most gas stations almost always having fuel in their pumps, what the average consumer does not realize is that it gets there “just in time” before they run out. This allows very little room for any kind of supply and distribution disruptions.

Furthermore, OPIS predicts that the high prices seen in early January can possibly be the highs for the year and possibly for 2019. As the report suggests, “crude oil finished the year much in the way that the New England Patriots finished Super Bowl LI, with a bang rather than a whimper.” That does not mean it set a precedent.

“OPIS believes that a modestly more expensive year for gasoline (and crude) will be the outcome of 2018,” OPIS states in its report.

GasBuddy explains the steady increase in fuel prices over the past two years by pointing to OPEC. In November 2016, OPEC countries made a deal to limit oil production as a way to address the global glut that sent prices falling. As a result, prices went up, but not as much as hoped for.

That deal was extended for the rest of 2018. Chances are this will only stabilize current prices rather than propel another price surge, but it also prevents another drastic dip.

On Friday, Jan. 19, the International Energy Agency announced that U.S. oil production is poised for “explosive” growth in 2018. U.S. oil and gas 2040 output projections hit a level 50 percent higher than any other country has ever managed, according to IEA. This push could send the U.S. surpassing both Russia and Saudi Arabia, making the country the global oil leader. Subsequently, this could possibly negate any progress made from the OPEC production cut deal.

Again, so many variables that can go so many different directions. In the end, overall predictions are mostly optimistic.

“We do not believe that a return to the apocalyptic numbers of 2008 or 2011-14 looms unless there is an apocalyptic geopolitical or meteorological event,” OPIS’s report says.

MATS

Tyson Fisher joined Land Line Magazine in March 2014. An award-winning journalist and tireless researcher, his news reports, features and blogs bring depth to our editorial content, backed with solid detail. Tyson is a lifelong Kansas Citian.