Diesel fuel; what will prices do?

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I live in a rural area where many residents buy bulk diesel and store it in 240/500 gal tanks for use in their tractors and farm vehicles. A neighbor with a nearly empty tank has just discovered that the diesel he bought some months ago for .60/gal is now about .95/gal. Can any of you y2k/petroleum experts give us some idea of what is likely to happen to diesel prices in the coming months? Can we expect any reduction in prices, or will they continue to rise as the y2k transition approaches? Will there be shortages as time passes? In other words, can you provide any advice on when we should buy our y2k diesel fuel?

-- Norm Harrold (nharrold@tymewyse.com), June 26, 1999

Answers

The price of out-of-the-money call options on crude oil for January 2000 through April 2000 has gone through the roof lately.

This indicates that oil experts are expecting a large price increase. By looking at the price of options versus expiration date, everything points to a January 2000 date where things will really go up. [Buying such options makes sense as an investment if you believe the New York Mercantile Exchange will be around after that time.]

Diesel is simply a by-product of crude oil, so it will go up, too.

But, as far as your neighbor, a few months ago the price of crude oil was about $10 a barrel. Now it's about$18. We also have seen gas prices go up -- for the same reason. Crude oil could easily hit $30 a barrel if oil producing countries (Saudia Arabia, Venezuela) run into trouble with wells and pipe lines. The price of diesel and gasoline will depend on both the price of crude oil and the state of the refineries in this country. Won't be cheap, though.

-- don't care (to@tell.you), June 26, 1999.


As bad as the prices are, buy now. Prices are only going to go upwards because the oil refineries are soon going to make the seasonal switch from gasoline and diesel production to home heating oil and kerosene. If you wait, there will be a limited suply of diesel (and gasoline those stocking that) to meet a larger than normal demand.

And if worries about crude oil supplies getting disrupted by Y2K become widespread, then you may end up getting cut off at the pump when oil companies steer product towards "key" customers; government, railroads, trucking and bus companies which have long-term contracts.

And for everyone else, as they say it's all supply and demand when it comes to prices.

WW

-- Wildweasel (vtmldm@epix.net), June 26, 1999.


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