A crude harvest present

Those who are lucky enough to be still harvesting are receiving an early Christmas present in the form of a reduced fuel bill. Diesel is one of the biggest costs on farm, so it’s worthwhile looking at this downward move.

In mid-September, I covered fuel in the sarcastically titled ‘The great fuel robbery of 2018’. During this time fuel prices in Australia had risen dramatically to the highest since 2014. This led to calls to boycott the fuel companies. My view, in this case, was that boycotting the fuel companies was an ineffective action as the price of fuel is based on factors largely out with the fuel stations control. It is a function of commodity pricing.

In early October crude oil futures reached a four-year peak (Figure 1). The market has fallen dramatically since then. Diesel is a derivative of crude oil therefore when crude falls, in theory so should diesel (and vice versa).

To show this, I examined the weekly change in price between crude oil and diesel over the past six months. In figure 2 the movement in price (as a %) is displayed, clearly showing a strong relationship. This chart uses a lag of one week, which signifies that there is a delay between the value in crude moving and diesel prices.

The correlation between the two commodities is displayed below, with 1 being a perfect correlation and 0 being no correlation.

  • 0 lag : 0.33
  • 1 week lag :78
  • 2 week lag :66
  • 3 week lag :41

The result of this downward movement in crude has been that diesel prices in Australia have started to reflect the fall (Figure 3). This means that any purchases at present should be considerably cheaper than pre-harvest which will be welcome to all.

What does it mean/next week?:

November was the weakest month for crude oil futures during the past decade. This is due to supply outstripping demand, with US stockpiles at record highs in recent months.

Prices are likely to stay weak until we see either an improvement in global economic growth or production curbs enacted by OPEC.

Key Points

  • Diesel is a derivative of crude oil.
  • There is a strong correlation for a 1 week lag in changes in crude oil being reflected in diesel prices in Australia.
  • In November, crude oil had its worst month in ten years.