The U.S. Energy Information Administration (EIA) revised its forecast downward of 2016 crude oil prices due to ongoing weak global growth and higher oil production. Specifically, the EIA lowered its 2016 forecast price for U.S. benchmark oil by $8 to $54 per barrel. In addition, the EIA expects Brent, the global pricing benchmark, to average about $59 per barrel in 2016. This is terrific news for fleets, promising another year of low fuel prices.
Global supply and demand for oil in 2016 is forecast to remain at today’s levels, which will continue to be downward pressure on fuel prices. The EIA said it lowered its forecast of oil prices in 2016 due to concern about lower economic growth in emerging markets, expectations of higher oil exports from Iran, and continuing actual and expected growth in global crude oil inventories.
An independent indicator supporting the EIA forecast is the oil futures market where investors buy future oil contracts based on anticipated prices as a form of hedging or as an investment to sell at a future date if actual prices are higher. Current prices in the oil futures market reinforce the contention that oil prices will continue to remain flat in 2016. Another indicator is supply and demand, which shows global oil inventory exceeding user demand.
The Domino Effect of Lower Fuel Prices
Fuel represents approximately 60 percent of a fleet’s total operating costs. Consequently, the stability of fuel pricing over the past 36 months has been the No. 1 factor contributing to keeping fleet operating costs flat. This current, multi-year period of fuel price stability has seen the minimization of unpredictable pricing volatility that resulted in unanticipated price spikes ravaging fleet budgets in past years.
Over the past decade, the percentage of imported oil has continued to drop with the increase in domestically sourced oil. This has lowered the impact of price volatility in oil-producing regions mired in political instability. For instance, the recent turmoil in Syria, Yemen, and Venezuela resulted in minimal price volatility in the U.S; which, in the past, most likely would have resulted in pricing gyrations.
Continued flat fuel prices will be a key factor influencing 2016 and 2017 model-year acquisitions. It is well documented that fuel prices influence vehicle acquisition decisions in the retail market, which some fleets are using to their advantage. New- and used-vehicle markets tend to react to fluctuations in fuel prices. When prices are low, buyers are more willing to consider larger, less fuel-efficient vehicles. With fuel prices flat, the impact of fuel cost on fleet budgets will be driven by total consumption rather than cost per gallon.
A corollary benefit is that lower crude oil prices have kept the cost of replacement tires stable for the past several years. Replacement tires are the third highest operating cost expense for fleets. The forecast is that ongoing softness in oil prices will continue to exert downward pressure on replacement tire prices.
Price Difference between Diesel & Gasoline
An ongoing trend is the narrowing of the price gap between gasoline and diesel. Historically, diesel prices have been lower than gasoline, but this changed in 2005 when per-gallon diesel prices surpassed gasoline. Today, the difference in price between diesel and gasoline is nearly indiscernible in some markets.
One corollary advantage is that lower diesel prices have exerted upward pressure on higher resale values for light-duty trucks, and this is expected this to continue in 2016. The price of fuel has a causal relationship with resale values, with lower fuel prices benefiting lower mpg vehicles, and higher fuel prices benefiting smaller, more fuel-efficient vehicles. Lower fuel costs stimulate higher resale values, resulting in a lower cost per mile and making certain vehicle classifications more affordable to operate.
Since oil prices are denominated in U.S. dollars, the strength of the U.S. dollar gives much support to pump prices staying on the low side of the pricing spectrum. It is important to note that fuel is a volatility commodity that can quickly send oil prices in one direction or the other.
Despite lower fuel costs, corporate sustainability programs remain strong at multinational fleets. Although there may be less pressure for alt-fuel vehicles (AFVs) and a decreasing interest in hybrids. With transaction prices often higher for hybrids and AFVs, depreciation correlates to fuel prices with lower fuel prices resulting in higher depreciation for AFVs.
Fortune or Misfortune?
Lower prices for gasoline and diesel have been a welcome relief for fleets, in some cases, reducing operating costs by 25-30 percent. While the past three years have been heaven-sent for the fleet industry overall, it has had a dramatic impact on fleets operated by energy companies, which are scrambling to cut costs to offset the decline in oil prices. Industries directly or indirectly attached to the price of oil (upstream to downstream) are experiencing a revenue and cash flow squeeze.
The unfortunate fact of life is that one person’s fortune is sometimes another’s misfortune. Nonetheless, all indicators point to retail prices remaining soft for both gasoline and diesel well into the 2016 calendar-year. If this occurs, as many believe it will, it will make the fourth consective year of flat operating costs.
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Originally posted on Automotive Fleet