Forecasting fuel rates for 2013 no easy chore

Forecasting fuel rates has never been more difficult for shippers, maintained Derik Andreoli, Ph.D.c., a senior analyst at Mercator International LLC and Logistics Management’s popular Oil & Fuel columnist. When planning for 2013 energy fluctuations, logistics managers must keep an eye on several global issues, he said.

“For example, what’s going on in Iraq and Iran? Will shale gas drilling rates and NG production and consumption remain stable? Will drilling rates and production of shale oil increase even as oil wells disappear? These are all questions looming large for shippers this new year.”

Lacking a crystal ball, the best anyone can do is evaluate the fundamentals of global supply and global demand, notes Andreoli. If demand grows faster than production capacity, surplus production capacity – the world’s buffer against actual supply shortfalls – will be diminished, and prices will rise. Conversely, if production capacity grows faster than demand, we should expect some easing in price volatility, though not necessarily price levels.

“Over the last two years, surplus oil production capacity has declined from nearly 5.5% of world consumption to a hair over 2%,” he said. “In absolute terms, this amounts to only 2 million barrels per day. This means that a disruption in any one of the world’s major producers will have a significant impact on prices. Unless surplus capacity recovers, any escalation of social/economic/political tensions in any of the world’s major oil producing regions will introduce a significant risk premium and prices will become increasingly volatile.”

On the demand side, said Andreoli, OECD consumption is expected to decline primarily as a consequence of these economies becoming more fuel efficient (through a combination of both increased fuel economy and fuel switching). Led by China and India, emerging market demand is expected to be significant despite the fact that China’s economic growth is slowing. Overall, demand is expected to grow, and it is difficult to see how global surplus production capacity will increase significantly over the coming year.

“There is one wild card, however, and that is Iraqi production. After decades of underinvestment under Sadam Hussein, Iraqi production has been booming. If Iraq continues this performance, surplus oil production capacity could increase, which will be advantageous from the perspective of price volatility.”

Andreoli said that given the high price for a marginal barrel of oil – like those produced from the Bakken and Eagle Ford shale plays – it is unlikely that prices have much downward flexibility. Logistics managers can reduce their exposure to risk by concentrating on packaging and materials handling, he advises.

“Work with carriers to design an incentive program designed to reward carriers for increasing fuel efficiency,” said Andreoli. “How carriers pack trailers/containers is as important as how shippers pack their boxes, and shipping less air is the goal here, too. Outside of packing the trailer, carriers can gain significant fuel savings (close to 10%) from switching to single tires (as opposed the double tires which still dominate), and additional savings can be realized through the installation of aftermarket aerodynamics kits. Carriers can also save fuel by reducing idle time and slowing down. There are onboard GPS enabled technologies that can help here.”

Finally, said Andreoli, shippers should evaluate the location and size of distribution centers.

“There is a trade-off between the savings that can be realized through mega DCs and the increased fuel costs that supply chains organized around them must accept,” he said.