Practical, reliable information is essential when making critical business decisions and engaging in operational planning. An accurate fuel price forecast is one vital tool.
Wholesale fuel companies might use information from oil benchmarks like West Texas Intermediate (WTI) or Brent crude, US Energy Information Administration (EIA) forecasts and proprietary data to foresee the future. However, unexpected events such as supply disruptions, political events that affect oil supply (such as the recent invasion of Ukraine), and other variables can make it difficult to have a reliable short-term energy outlook.
Success as a fuel buyer correlates directly to the available tools and effective use of those tools. With no end of business ‘solutions’ available for the oil and gas industry, there are more options than ever before. Truthfully though, many of those solutions are incomplete, inconvenient, or ineffective.
Thankfully, advancements in technology have yielded significant benefits to many wholesale fuel buyers in recent years. With the Temperature Correction Index from DTN, you can ensure you get the best price at the rack.
One of the most important tools a fuel purchaser needs is a fuel price forecast. When evaluating fuel prices, undervaluing the importance price and transport have on the purchase can lead to expensive errors. Those are two well-understood factors at play when forecasting fuel prices.
This article looks at another vital factor that should also be reflected in your fuel price forecast: weather.
How weather affects your fuel price forecast
There are three main ways weather can affect your fuel price forecast: seasonality, severe weather, and temperature.
The blends used for gasoline and diesel fuel change depending on the season.
The US Environmental Protection Agency federally mandates limits of what’s called Reid vapor pressure (RVP) in gasoline blends to regulate air quality during warm temperatures. In general, refiners and terminals must meet summer-grade gasoline standards by May 1. However, there are many different RVP limits and effective dates, depending on state and regional requirements.
Diesel fuel also has a summer blend and a winter blend, though the reason is for engine performance and operation rather than an environmental concern.
Making the switch to summer blends does not happen overnight. Refineries tend to make the changes gradually as they move into the start of summer. This switch also costs refineries money, which is why gas prices are often higher when coming into the summer months.
Better road conditions, warmer weather, and school breaks between May and August contribute to making summer the peak driving season in the United States. As millions of vehicles hit the roads and travel thousands of miles for summer road trips, demand for fuel rises, leading to an increase in prices.
Moving into the winter months, refineries need to adjust their production to accommodate the increase in heating oil demand. Some winters are colder than others, precipitating a higher demand for heating oil, resulting in less refinery capacity for other fuels, as well as higher prices for those products.
The Atlantic hurricane season typically runs from June to November and can put pressure on the oil and gas industry. Severe weather can cause refineries to close, leading to a loss of global oil production upwards of 800,000 barrels per refinery per day, depending on the severity of a storm’s effects.
For example, when Hurricane Ida made landfall in August 2021, nine US refineries in the Gulf of Mexico shut down or reduced output. The US Department of Interior estimated that this disrupted 96% of crude oil production and 94% of natural gas production in the region.
A refinery can also be damaged during extreme weather events, leading to further losses in production as it completes needed repairs. Even if a storm does not happen as expected, just the expectation of severe weather can be enough to drive prices up. Refineries could be shut down to protect certain components particularly at risk of damage if the storm hits while they’re in use. Also, workers may be evacuated in anticipation of the storm. Uncertainty about production levels then upsets the market.
In addition to tropical storms and hurricanes, severe winter weather also has an impact. Winter storms are known to cause electricity shortages which interfere with production. Once the refined products are ready for transportation, winter road conditions can slow distribution to the terminal.
The fuel purchase temperature also affects the fuel price forecast – especially when buying in bulk. As with all matter, refined fuels expand in the heat and contract in the cold. In an effort to more accurately define the amount of refined fuels volumes for purchase, those fuel volume measurements are corrected for temperature at 60 ⁰F.
For example, when 1000 gallons of gas bought initially at 80 ⁰F cools to the temperature-corrected 60 ⁰F, it will contract – leaving you with less than the purchased 1000 gallons of gas.
A purchaser must ask, is gross or net volume counted when purchasing fuel? Has the volume of gas leaving the rack (gross volume) been used for calculation, or is it the volume of gas that is actually delivered (net volume)?
In the US, the answer depends on the state in which the transaction occurred. Northern states are required to sell gas in gross gallons, while southern states sell according to net gallons.
The bulk market prices fuel in net gallons. When accounting for all the factors a fuel buyer needs to consider, the lifting temperature may seem like a minor detail that can be ”good enough.” However, the reality is that seemingly insignificant details often significantly affect your company’s profits.
Get all the information necessary to buy fuel in one place with DTN
Fuel purchasing is no easy job. However, armed with the right tools and insights you need to succeed, it becomes more straightforward. After all, the quality of your decision-making is dependent mainly on the accuracy and actionable insights derived from the data you have available to you.
Unnecessary worry about recording errors, bias, or incomplete (or inaccurate) data wastes time and resources. Countless oil and gas companies worldwide trust DTN to provide both accurate and actionable information they need. Our Temperature Correction Index solution eliminates the nebulous guesswork of previous fuel temperature estimations, and delivers actual measurements you can trust.
DTN is an industry leader dedicated to providing an unparalleled, analytical look at demand activity while delivering trusted insights.
Try the Temperature Correction Index today and reduce uncertainty in your fuel purchases.