Prices expected to rise next year because of a forecast for colder temperatures and increased demand from ship owners
Now may be a good time to lock in diesel prices, according to a couple of analysts.
The average diesel price in Canada was $1.22 per litre as of Dec. 19, the lowest level since March 2018, according to GasBuddy.
Diesel has been following crude oil prices lower. The West Texas Intermediate price for crude oil as of Dec. 19 was US$47 a barrel, down 39 percent from the $77 a barrel it was selling for in mid-October.
“That’s a real strong indication of why prices for diesel have dropped,” said Dan McTeague, senior petroleum analyst with GasBuddy.
But in general, diesel prices are still at historically high levels, and he believes the fuel that farmers rely on could be getting more expensive in 2019.
There are a number of reasons for that dismal outlook, but none bigger than the United Nations’ International Maritime Organization instituting a cap that will limit marine fuel sulfur emissions to 0.5 percent starting Jan. 1, 2020, down from 3.5 percent today.
To meet the new standard, ship owners will either have to install expensive scrubbing equipment, use liquefied natural gas or switch from using heavy, thick bunker fuel to a form of diesel.
Some ship owners have already made the switch, which is increasing demand for diesel. However, as the maritime sector gets closer to the Jan. 1, 2020, deadline there will be more switching and growing demand for diesel, which means even higher prices.
Bruce Burnett, director of markets and weather with Glacier’s MarketsFarm, agreed.
“The increase in demand will boost diesel prices relative to the historical spread to crude oil,” he wrote in a recent newsletter.
“This may be a good time to lock fuel prices for 2019 as a way of protecting against a rise in diesel prices.”
In late December, weather forecasters such as AccuWeather started forecasting changes in the upper atmosphere that could impact the polar vortex, “which may trigger outbreaks of Arctic air over parts of the Northern Hemisphere during January and February.”
If that occurs, it could have an impact on diesel demand and prices.
“Take advantage of these lower prices (because) there’s a likelihood they could go a little higher,” said McTeague.
Another factor is the federal carbon tax that is scheduled to be implemented April 1, 2019. Diesel prices in Manitoba and Saskatchewan would rise by about six cents per litre when that tax is applied, he said. Alberta already has a carbon tax.
And then there are the efforts by Alberta and the Organization of Petroleum Exporting Countries to curtail crude oil production.
“The intention is to see oil move up from $47 back to the $60 range, which would have an effect on diesel prices,” said McTeague.
Hedging fuel is a difficult proposition because there are so many factors that influence the price, but when he looks at the existing fundamentals, it might be a good time to consider locking in the price.
“I sense that there is more room for diesel to increase in the year ahead,” said McTeague.
His one big caveat is the economy, with some analysts calling for a global recession in 2019.
“If it’s a strong economy or consistent economy, I think diesel will move up in price. A weaker economy, all bets are off,” he said.