Petroleum Prices to Become More Volatile
RedStone Resource
April 17, 2023
Inside This Edition
Federal Reserve Likely to Continue to Hike Rates, Which Could Impact Inventories
The Federal Reserve is likely to hike interest rates at least one more time, analysts believe that the Fed will hike 25 basis points more in its next meeting to push the Fed Effective Rate to almost 5.1%. Average inflation is still rising at a 4.6% rate vs. wages that are growing on average 4.2%.
Supply Chain Disruptions Much Lower, But Still an Issue
Several Fortune 500 firms reported over the past few weeks that supply chain disruptions were still hampering output. The challenges appear to be supplier specific or sectoral in nature, hitting a single industry or a specific commodity type.
Job Openings Still Remain High, Especially in Transportation and Warehousing
The PPI for freight rail showed that prices were still 6.6% higher year-over-year and historically rates are still trending above the 20-year average. There is no denying that rates are easing, and the PPI includes both spot, contract, and fuel surcharge impacts.
ECONOMIC BRIEFING
Petroleum Prices to Become More Volatile
After OPEC+ announced that it would work on cutting petroleum output by 1.2 million barrels per day starting in May, oil prices have become volatile. Prices for West Texas Intermediate are 24% higher since March 17th, despite still being down by 9% versus levels from a year ago (which were at the start of the War in Ukraine). Year-to-date, prices are 2.3% higher.
The EIA is forecasting that diesel prices will be averaging $4.11 in 2023 and is expected to fall to $3.87 in 2024. Much of this drop in price is due to an expected contraction in global demand and it assumes a steady production of diesel – despite many refineries still needing to conduct more aggressive maintenance on some facilities that were worked hard during the winter months.
Given that Russian oil prices are fetching more than price caps allow, it appears as though sanctions and controls on Russian oil are not having the intended effect. This actually keeps more products on the global market and could moderate prices more than expected. Russian oil was last trading at nearly $62 a barrel, which still makes it an affordable bargain.
Federal Reserve Likely to Continue to Hike Rates, Which Could Impact Inventories
Historically it is clear that interest rates can affect product order patterns (which ultimately can change freight volumes and transportation prices). Oversimplifying, as interest rates rise it pushes the cost of capital higher and supply chain managers are forced to weigh the advantages of holding heavier inventory volumes (to reduce stockouts) against the cost of doing so.
The Federal Reserve is likely to hike interest rates at least one more time, analysts believe that the Fed will hike 25 basis points more in its next meeting to push the Fed Effective Rate to almost 5.1%. Average inflation is still rising at a 4.6% rate vs. wages that are growing on average 4.2%. In addition, moves by the Federal Reserve can change the value of the dollar. The US dollar has dropped 1.9% YTD, which increases the cost of imports. Historically, a rapid change in the value of the US dollar has historically led to significant shifts in transportation freight volumes. One such period was from 2014 to 2016 in which the value of the dollar surged, and inventories surged at the same time (because it was advantageous to use the purchasing power to stockpile resources). Transportation activity was robust in 2014 on the front-end of the period followed by a freight volume slump that followed from late 2014 through 2016. It does have a bearing on what happens in the industry, which is why this will be watched so closely in the quarters ahead.
TRANSPORTATION BRIEFING
Supply Chain Disruptions Much Lower, But Still an Issue
Several Fortune 500 firms reported over the past few weeks that supply chain disruptions were still hampering output. The challenges appear to be supplier specific or sectoral in nature, hitting a single industry or a specific commodity type. Most of the challenges have been mentioned across the automotive, machinery, and aerospace sector.
Clearly, conditions are much better than they were in the summer of 2021 or early in 2022 amid Covid challenges and the outbreak of War in Ukraine. Today, global inventories of products like aluminum, copper, nickel, lead, zinc, and many others are still sitting near multi-decade lows at a time when global demand is weaker. The concern is that any improvements in demand (especially as China emerges from the ending of zero-Covid policy and Europe emerges from an energy-hampered winter season) will boost consumption in the global manufacturing sector and push prices for these tighter commodities much higher. It could also lead to some problems in ensuring supply chain continuity.
If there is a bottom line to this story, it is that supply chain continuity is much better than it was in the past two years, but problems still exist and unless some inventories of key commodities improve, it could lead to more disruptions and delays later in 2023.
Producer Prices for Most Transportation Modes Soften in March
The Producer Price Index was released for three primary areas of transportation, namely freight rail, truckload, and less-than-truckload. The PPI for freight rail showed that prices were still 6.6% higher year-over-year and historically rates are still trending above the 20-year average. There is no denying that rates are easing, and the PPI includes both spot, contract, and fuel surcharge impacts.
Truckload prices are getting hit harder, despite them still trending above their longer-term average growth rates. Near term, they were down 2.9% month-over-month in March and were down more sharply by 16.6% year-over-year against much more difficult comparisons.
Less-than-truckload rates were down 0.9% month-over-month in March and were down 2.2% over last year’s rates. But once again, based on the long-term average, prices are still well above those long-term averages.
