Taking a Wider View
November 15, 2018
Written By Tim Danze
The energy market is full of questions these days. What is the Organization of the Petroleum Exporting Countries (OPEC) up to and has the cartel reestablished its relevance? How much of a factor is Russia playing? Where does the United States stand with its abundant shale oil production and new position as the world’s largest oil producer? If you put all this in a bowl and stir it up, what do you get, and more importantly, what does it mean for our local customers?
While the dynamics of the global oil industry continue to change, it remains a volatile business that is influenced by a number of worldwide factors. The mercurial nature of the energy market remains the one thing you can count on, no matter the effects of globalization on trade and production.
To gain a better understanding of the market, it’s helpful to step back and take a wider view. OPEC agreed to cut crude oil production way back in November 2016, and those production cuts took effect in January 2018. OPEC members have done a surprisingly good job of sticking to the plan and, as a result, global supplies have tightened and oil prices have moved higher.
If you look at the chart for weekly ultra-low sulfur diesel futures, the orange vertical line is on Sept. 18, 2017, roughly a year ago. Since that date, prices have gradually trended higher despite some corrections. A look at unleaded gasoline futures shows prices have charted a similar course.
Now, keep in mind, past results should not be relied upon to predict future performance as no two years are ever the same. The current situation and circumstances are different than they were a year ago, but are they better or worse and how can we use this information?
During my time as a hedging manager, the plan I’ve observed that has offered the best results has been to steadily buy over a period of time to average costs for a budgeted price level. Let me say that again. Make it easy on yourself by purchasing a percentage of your needs a bit at a time over the next several months. Doing so will help to average out your overall position and price. Knowing your budget for fuel can make this buying decision a whole lot easier.
Historically and seasonally, the market pulls back in the winter and offers opportunities to make advantageous purchases. The market did see a little pullback last December and January, but those dips didn’t offer a better deal than September’s pricing. So buying some now, more before year-end and then again in January is a good strategy.
Check those time frames, pick a date and write it on your calendar or share your dates with your local MFA Oil bulk plant manager. This will help you execute your plan and take the emotions out of it.
If you would have participated in MFA Oil’s contract program and taken this approach over the last 10 years, you would be ahead of the game. Would it have been a home run every year? No. But overall, you would have locked in a competitive price and saved yourself some time, money and headaches. I firmly believe if you take this plan and put it in place over the next 10 years, you will be better off than if you did not do it.