Oil and Diesel Dance in Tune

Market Monday - Week 10 - Deeper look on the key factor of diesel price

For a long time, diesel fuel has been a fuel of choice when building flexible long distance transport solutions. For road-, rail- and even some sea transports it’s used whenever high energy density and cost efficiency are main concerns for the stakeholders. Despite coordinated decarbonization efforts by EU, local governments and private companies, diesel fuel is still de facto default option in long distance road transport and will remain so in the near future. While the potential alternatives are already on horizon, understanding diesel price dynamics is essential for forecasting operational costs for inland transport.

Let us examine what influences the diesel fuel markets in the EU and what makes the figures on roadside totems change over time.

The obvious and largest cost driver is crude oil price. With only a limited domestic oil production, the EU depends heavily on global market dynamics, importing most of its crude oil and refined products, thus making local diesel prices susceptible to fluctuations in crude oil costs. As black gold constitutes the largest component in production costs, increases in oil prices usually immediately translate into higher diesel prices at the pump. However, it's important to note that the relationship between oil prices and diesel prices is not always linear. Diesel markets often exhibit an asymmetric pricing adjustment, where prices rise quickly with oil price increases, but fall slowly with decreases (see picture 1).

Furthermore, oil price increases can have broader economic implications. A significant and sustained increase in oil prices can negatively impact the euro area's potential output, leading to a decline in economic growth. This is because higher oil prices increase production costs for businesses, reduce spending power and put on inflationary pressures on consumers.

Expert opinions on the short term market outlook for 2025 are mixed, reflecting the uncertainty surrounding various influencing factors. Some analysts anticipate a relatively stable oil market, highlighting the role of OPEC+ countries and shale oil producers in adjusting production to counteract price swings.

Other experts predict oil price reductions through the year on considerable reserves available, and high spare output capacity among oil producers, exceeding possible demand increases. Non-OPEC+ producers are anticipated to increase their share on global markets, particularly those in the Americas: United States, Canada, Guyana, and Brazil. While OPEC+ production remains constrained by voluntary cuts implemented in previous years, it plans to gradually increase production according to the timeline agreed upon in December 2024. The second scenario is likely to materialize only in case of undisrupted supply chains and absence of new geopolitical risks: a risky bet to make.

Changes in foreign exchange rates can also influence diesel prices. As crude oil is typically traded in US dollars, a weakening Euro (or other national currency) against the dollar makes oil imports costlier for EU countries, potentially leading to higher diesel prices even during stable times.

So, while crude oil prices remain a primary driver, other factors like foreign exchange rates, taxation, supply chain disruptions, and environmental regulations all contribute to diesel fuel price fluctuations. Understanding these dynamics and being able to react to changes proactively is crucial for consumers, businesses and policymakers on the transportation market landscape. While industry explores potential alternatives like electric and hydrogen-powered vehicles, the transition will require significant investment and infrastructure development. Tune in to Freight Perspectives again soon, when we will discuss those alternatives, usage scenarios and current state of their adoption in our next article, planned for release this week.

Oleksandr Kulish
Consultant
Transporeon