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Fuel Prices in 2007: The Message of the Market

Fleet managers have enjoyed a few months of lower fuel prices, helping many to finish 2006 closer to budgeted levels. What should we expect in 2007?

One answer is provided by the market. The forward curve of futures prices shows what the big money thinks is most likely to happen in each month of the coming year. The chart below shows the wholesale pricing for gasoline blendstock (called RBOB in the markets).

RBOB_2007_curve.JPG

Two conclusions leap out:

1. Current low prices are temporary. This reflects current inventories and the relatively benign hurricane season.
2. Prices are expected to move sharply higher in the spring and summer. These levels will be the base price for expected summer consumption, even before any weather or geo-political shocks.

The $1.78 level, indicated by a horizontal line on the chart, is the average futures price. A budget for next year might use this as the basic wholesale price plus something (seventy or eighty cents, depending on local conditions) for transportation, taxes, and marketing.

There is a dangerous trap in current prices: A false sense of security. Looking at the forward curve of futures helps us to think ahead.

We have all set our 2007 fuel budgets. There is still time to protect against price increases. This can be done at little or no up-front cost.

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