Shippers warned of higher crude oil prices for New Year with several global threats

Just as shippers are getting a pleasant New Year’s present with lower fuel surcharges in the wake of plunging diesel fuel prices, here comes a warning to not get used to it.

For the first time since last July, prices for diesel oil at the pump have fallen below $4 a gallon. The nationwide on-highway diesel price averaged $3.914 for Christmas week—that’s 62 cents lower than a year ago. The last time diesel prices were this low was July 24, according to on-highway figures compiled by the Energy Information Agency.

A year ago, diesel was a stubbornly high $4.75 a gallon. That prompted diesel fuel surcharges as high as 80% on some truckload tariffs, and around 40% on less-than-truckload (LTL) shipments.

The questions now is how long will this crude oil slump last and how low can diesel prices fall?

Short answers: Not long, and not very much further. In fact, many analysts think this may be diesel’s low point for all of 2024.

“Oil supply and transportation risks are rising just as the world is on the cusp of a global supply deficit,” Phil Flynn, oil analyst with Price Futures Group, said in a note to investors.

That combination, he said, will make it very dangerous to carry short positions on crude oil or its products. He predicted oil supply draws should start this month, further pushing crude oil inventories into the below-average territory for this time of year. 

This comes as Iran seems determined to challenge the Biden administration that so far has allowed Iran to flex its muscles in the volatile Middle East region, Flynn said.

Oil prices slumped dramatically to close out 2023, dropping nearly 20% from their September highs. Analysts are predicting prices to rise modestly early in 2024, as demand improves and production cuts by the Organization of the Petroleum Exporting Countries (OPEC) keep the market balanced. But a few factors could cause a much larger reaction in oil prices—impacting stocks and overall inflation.a

A few risks stand out as we enter 2024, which might as well be called the Year of the Unknown for oil prices:

•  Wars in the Middle East have historically had outsize impacts on oil prices. So far the Israel-Hamas war has not caused major shocks, surprising analysts. Actually, oil prices mostly have fallen since Hamas started the Israeli conflict on Oct. 7.

But there are signs that’s starting to change. Yemen’s Houthi faction has attacked oil tankers in the Red Sea in solidarity with Palestinians. Global shipping companies have rerouted tankers and containerships on much longer journeys, forcing shipping rates higher and sending oil prices about 8% higher. Should the attacks intensify and force more tankers to avoid the canal for a longer period, analysts said, that could cause a more dramatic reaction in the oil market.

If Iran gets more directly involved, for instance, it could spark a much more complicated conflict that would almost certainly cause prices to rise by a double-digit percentage.

• Venezuela could also spark a 2024 surprise. The government of President Nicolás Maduro has claimed to own a region of Guyana known as Essequibo that’s close to an area that Exxon Mobil has been exploring for years. Exxon is producing more than 600,000 barrels of oil per day offshore Guyana, and is set to ramp production up to more than 1 million barrels per day in the coming years, which could amount to a quarter of the company’s production. Maduro says that some areas Guyana is auctioning off are in Venezuelan territory. He has demanded foreign companies leave the disputed area, though oil companies have continued operating.

“We are not going anywhere—our focus remains on developing the resources efficiently and responsibly, per our agreement with the Guyanese government,” Exxon said in a statement.

Insurance companies, however, have noted the attack. Lloyd’s added parts of Guyana to its risky shipping areas list, which could raise the cost of doing business there.

A broader conflict involving Guyana would threaten a significant piece of the global oil market and cause prices to spike. In addition, Venezuela has been increasing its production of oil from its own territory after the U.S. eased sanctions. But Flynn noted for Venezuela to continue drilling, Maduro will have to hold free elections in 2024. Should sanctions come back, Venezuela’s production would fall and oil prices would probably rise.

• A third potential surprise is that if OPEC changes tactics, surprising investors by boosting output and sending prices lower. The cartel and its allies, together known as OPEC+, have repeatedly cut production in the past year, announcing more than 4 million barrels’ worth of cuts for 2024.

But so far those announcements have failed to lift oil prices, as non-OPEC production from the U.S. and elsewhere has surged and demand has been weak. It will be extremely difficult for OPEC to cut more and keep the group together. Recently, Angola said it is leaving the cartel to pursue its own strategy.

Angola oil minister Diamantino Azevedo also departed and took a shot at OPEC, saying, “Angola currently gains nothing by remaining in the organization.”

Most of OPEC’s output cuts are expected to last for all of this year. But the cartel, notably unpredictable, could surprise the market by bringing back some production, retaking market share.

Natasha Kaneva, head of commodities strategy at J.P. Morgan wrote “the alliance should unwind some of the voluntary reductions to gain operational flexibility when demand growth takes a step down in 2025 (and potentially 2026), when most of the post-Covid demand normalization is behind us and decarbonization policies begin to cut into demand for some products.”

Cutting back crude oil supply could result in near-term pain for energy companies, Flynn noted. But it would give OPEC more flexibility heading into 2025, he added.

All this occurs as trucking executives grapple with the introduction of various alternatively fuel vehicles. All are promising technologies, and all have their drawbacks.

“While electric vehicles are hitting the market first, they may not be suitable for every application at this time—especially when it comes to regional and long-haul transportation,” Kent Williams, executive vice president of sales and marketing for Averitt Express, the nation’s 11^th-largest LTL company, told LM.

“We believe EVs (electric vehicles) could be the way of the future for all class 8 tractors, but there are significant issues preventing adoption at scale now,” Williams added.

He noted that current EV tractors do not have the range for any major fleet applications, nor would they allow fleets to get the round-the-clock use that most sizable carriers do today.

“The most significant challenge is that our facilities lack the necessary physical infrastructure from local electric companies that would allow us to charge an adequate number of tractors each day,” Williams explained. “Keep in mind, many of our facilities have more than 100 tractors. Most of these facilities would require a new electrical substation to be built to charge fleets of this scale,” he said.

“The challenge is still on the charging/infrastructure side, but there is testing going on as we speak, Williams added.

  Eventually, it is possible that alternative technologies to EVs, such as hydrogen, compressed natural gas (CNG) and liquified natural gas (LNG), might emerge as the clear alternatives to diesel.

“Given the current options and the extensive range required for our operations, clean diesel remains the most practical choice for most of our fleet,” Williams said.

Which explains why most shippers and trucking executives still lay awake at night fretting over the future of crude oil pricing.