Market Morsel: Fuels Furious Advance

Article courtesy of MARKET MORSEL | BY ANDREW WHITELAW , TEM

Fuel is in the top costs for many farms. In recent months, we have been talking about the advance of fuel pricing due to increasing crude oil values. In the past fortnight, its gone to new highs.

The crude oil and diesel price is closely related, but one of the questions we get regularly is “why does it move up quicker than when it comes down?”

So I thought it was worthwhile looking into it.

The first chart below shows the spread between diesel to crude on a weekly average basis. It’s quite clear that the diesel spread is at historically high levels. The current weekly average is A$1.25/l. The average spread over the past ten years has been A$0.72/l.

At the moment, the diesel price is averaging A$2.12/l, so if the spread were to return to a normal spread of approx A$0.70/l to A$0.80/l, we would see diesel prices revert back to a more palatable level of A$1.58 to A$1.68. Fingers crossed, but bear in mind ignoring the recent fortnight; this would still be close to record levels.

Who thought we’d be jumping for joy at diesel around A$1.60/l!

So how long does it take to flow through? The second chart shows the weekly change in price between crude oil and Australian diesel. This has been lagged for one week on diesel. When we look at the correlation of the two movements over time, it is far lower when not lagged. This points towards there being a delay – but only about a week before prices react to the crude.

One of the things we notice on the chart is that crude moves around a lot more than diesel. This is a common occurrence when comparing futures and physical markets, one we see all the time in grains.

Generally, the correlation is high. There are, however, times when this correlation blows into negative correlations. The third chart below shows the 3 month rolling correlation of crude and diesel, A perfect correlation would be 1, no correlation 0, and a negative correlation -1.

If the diesel prices immediately moved with crude, you’d find the cost of diesel going up and down by the time you got across the forecourt to pay for your fuel (and potato cake).

Through looking at the data, provided crude oil stays low, then we should, in theory, see fuel prices drop in Australia towards the end of the week. If fuel prices stay at a huge premium, then that really is an issue to be examined.

Thomas Elder Markets (TEM) is an independent, data-driven market analysis service that provides premium agricultural market insights and reports. Our online reports are provided completely free of charge, with no strings attached. Sign up to the TEM newsletter now.