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02.23.09 -- Diesel Loses Premium to Gas as Jetta Autos Appreciate
Bloomberg.com News
Diesel Loses Premium to Gas as Jetta Autos Appreciate
By Robert Tuttle
Feb. 23 (Bloomberg) -- Diesel, which has traded consistently above gasoline in the U.S.
since July 2007, will sell at a discount by April as a global recession saps demand for the
world’s most-consumed transport fuel and inventories rise.
“By April, gasoline is going to cost more,” said Andrew Reed, an Energy Security
Analysis Inc. oil expert in Boston. “Once we get past heating oil season, it’s all up to
diesel demand” to set distillate prices, he said. “The real weakness is going to be
exposed.”
The New York Harbor market price for diesel dropped 13 percent in 2009 to within 14
cents per gallon of gasoline, which rose 11 percent, according to data compiled by
Bloomberg. Reed sees diesel costing as much as 20 cents less from April until demand
for heating oil, its distillate twin, increases in the fall.
As reduced consumer spending trimmed the volume of goods transported, the American
Trucking Associations’ truck tonnage index fell 14 percent in December from a year
before, the biggest drop since 1996. U.S. consumption of diesel and heating oil declined
seven times faster than gasoline in January, the Energy Department says. Stockpiles rose
to 106.6 million barrels last month, the most since at least 1993.
The recession will cut world oil demand this year by a million barrels a day to 84.7
million, the biggest drop since 1982, according to the Paris-based International Energy
Agency. Oil in New York dropped 73 percent from a record $147.27 a barrel in July to
$40.10 at 9:41 a.m. today. Crude accounts for 39 percent of diesel’s retail price, the
Energy Department says.
More Powerful
Most trucks and locomotives use diesel engines, which are more powerful than gasoline
motors. Diesel engines are also at least 30 percent more efficient, according to the Energy
Department and Environmental Protection Agency. The fuel receives a tax advantage at
the pump in most European Union countries.
Declining demand hurts refiners Valero Energy Corp. and Marathon Oil Corp., which
together are spending at least $6 billion to increase diesel output. Their stock prices
dropped by more than half from a year ago, compared with a 29 percent decline in the
Standard & Poor’s 500 Integrated Oil & Gas Index, as refining margins narrowed.
Falling costs already helped the trucking industry, where bankruptcies declined 61
percent in the second half of 2008, according to the American Trucking Associations.
Efficient Cars
Lower prices may improve sales of diesel passenger automobiles, including Volkswagen
AG ’s Jetta TDI, the top selling such model in the U.S., said Michael Omotoso, a senior
manager with J.D. Power & Associates in Troy, Michigan. A version of the Jetta gets 30
miles a gallon in the city and 41 on the highway and is the third-most efficient car in the
U.S. behind two hybrids, Toyota Motor Corp.’s Prius and Honda Motor Co.’s Civic,
government data show.
Sales of the diesel Jetta are rising at East Coast Volkswagen in Englewood Cliffs, New
Jersey, Dennis Acosta, the dealership’s general manager, said in a telephone interview.
The Jetta TDIs are now selling a “little more rapidly than in the past few months as
people start to see a seesaw in fuel prices,” he said.
The growing popularity of diesel cars may help keep the fuel from weakening, said
Olivier Abadie , a Paris-based analyst for Cambridge Energy Research Associates Inc.
In Western Europe, where most countries tax gasoline more, 53 percent of new cars had
diesel engines last year, up from 14 percent in 1990, according to the European
Automobile Manufacturers’ Association of 15 auto, truck and bus makers. By 2013,
distillate will power almost three in five new cars sold in Europe, Omotoso said.
‘Price Premium’
“The diesel deficit in Europe will remain up to 2015 and probably even longer,” said
Jonathan Leitch, a senior analyst at Edinburgh-based consultant Wood Mackenzie Ltd., in
a presentation in London on Feb. 17. “Diesel should remain at a price premium.”
In the U.S., 9 percent of new cars and light trucks will run on distillate by 2015, up from
2.3 percent last year, Omotoso said, thanks in part to tax credits of up to $1,800 on some
diesel vehicles, including the Mercedes GL 320 BlueTEC.
“We don’t see gasoline continuing to rise and diesel continuing to decline; we see that
reversing,” said Cambridge Energy’s Abadie, whose company advises oil companies and
governments and is headed by Pulitzer Prize winning author Daniel Yergin.
Diesel prices in the New York market for mid-Atlantic and New England wholesalers
exceeded gasoline since July 2007 except for three days in September, when hurricanes
disrupted Gulf Coast refining. Diesel trades at about $1.26 a gallon, compared with $1.12
for gas, according to Bloomberg data. As recently as November, diesel was 67.77 cents
higher.
53 Percent Drop
At the pump, diesel averaged $2.258 a gallon in the U.S. yesterday, down 53 percent
from a record $4.824 in July, according to AAA, the country’s largest motoring club.
Gasoline averages $1.91, a drop of 54 percent from its July peak of $4.109.
“You are seeing diesel demand looking far softer than gasoline demand,” said Paul
Horsnell , head of commodities research at Barclays Capital in London, in a telephone
interview.
On the futures market, the summer of 2008 was the first time since at least 1987 that
gasoline stayed below heating oil, a price proxy for diesel, which isn’t actively traded,
according to Bloomberg data. Gasoline prices usually exceed distillate costs in the
summer, when vacations increase gas demand.
“If you look at your general reduction in trade, that means less shipping; it means less
trucking of goods around the country,” said Lawrence Eagles, global head of
commodities research at JPMorgan Chase & Co. in New York. “It wouldn’t surprise me
if, when we get to the summer months, we revert to the normal seasonality of gasoline
prices above those of distillate.”
Worst Performers
This year’s worst performers in the UBS Bloomberg CMCI Index of 26 major
commodities are natural gas and heating oil, which fell 23 percent and 20 percent
respectively.
Increased production is helping drive down costs. U.S. refinery output of diesel and
heating oil increased 18 percent in the five years through November, Energy Department
data show. Gasoline was unchanged over the same period. The U.S. exported 544,000
barrels of distillate a day in November, up from 81,000 in November 2003.
Reliance Industries Ltd., India’s biggest company by market value, started operations on
a refinery at Jamnagar in Gujarat state in December that’s designed to produce about
247,000 barrels a day of diesel.
Refinery Investment
Paris-based Total SA, Europe’s biggest refiner, is raising diesel production 50 percent in
the 10 years to 2015 by retuning refineries to make more of the fuel without consuming
additional crude.
Marathon ’s $3.4 billion expansion of its refinery in Garyville, Louisiana, will raise the
plant’s distillate output to about 40 percent from 33 percent, Robert Calmus, the
Houston- based company’s communications manager, said in an e-mail.
Valero , the largest U.S. refiner, devotes 35 percent of its capacity to diesel and plans to
increase that to about 40 percent, said Bill Day, its spokesman, in a telephone interview.
The San Antonio-based company will invest $3.1 billion to install equipment at its St.
Charles, Louisiana, and Port Arthur, Texas, refineries by 2012 that will increase daily
distillate output at each plant by 50,000 barrels, he said.
“The price has held up very well as we accumulate inventories,” said Tim Evans, an
energy analyst with Citi Futures Perspective in New York, in an interview. “It might not
take that much of an additional accumulation for the market to fall and fall dramatically.”
Helping Vulcan
All that extra fuel is lowering prices, aiding Birmingham, Alabama-based Vulcan
Materials Co. , the largest U.S. producer of crushed stone.
“Every 10-cent-per-gallon change in the price affects pretax earnings by approximately
$4.5 million at current demand levels,” said Donald James, Vulcan’s chief executive
officer, in a Feb. 10 conference call with analysts. Vulcan plans to purchase 45 million
gallons of diesel this year, he said.
Lower fuel costs saved Omaha, Nebraska-based Union Pacific Corp., the largest U.S.
railroad, $47 million in the fourth quarter, said Robert Knight, its chief financial officer,
in a conference call last month. “We are currently paying about 40 percent less than the
$2.84 per gallon we paid” in early 2008, he said.
Knight Transportation Inc. , a Phoenix trucker, earned $16.1 million in the fourth quarter,
the year’s best, when revenue was the lowest at $174.8 million.
‘The Only Break’
“Profitability in the quarter was helped by falling diesel prices,” said Kevin Knight, the
chief executive officer, in a conference call last month. “The only break it seems that
anyone has gotten recently was the long-awaited decline of fuel prices.”
Lower fuel bills are helping truckers stay in business as falling consumer demand reduces
the amount of goods shipped across country. U.S. retail sales in January were 9.7 percent
lower than a year earlier, Commerce Department data show.
A total of 375 companies with five or more trucks went out of business in the fourth
quarter, down from 970 in the second quarter, said Clayton Boyce, vice president of
public affairs at the American Trucking Associations in Arlington, Virginia. Fuel costs
account for about 20 percent of expenses, down from 40 percent last summer, said Bob
Costello , the group’s chief economist.
“The really fast drop in fuel prices gave many of them a last breath,” Costello said.
To contact the reporter on this story: Robert Tuttle in New York at
rtuttle@bloomberg.net
Last Updated: February 23, 2009 11:53 EST
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