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Turnaround in Diesel Prices Will Cut Trucking Company Profits

Rising diesel costs likely will curb trucking company profits at least until the companies can tack on surcharges to catch up with the 14% fuel price jump over the last three months.

Diesel prices last week hit an average of $2.27 per gallon, up from $1.98 in mid-February, according to the Energy Information Administration. Fuel costs are rising with demand for diesel domestically and overseas. Rising oil prices also are a factor.

Carriers tend to increase fuel surcharges as costs rise, but so far they haven’t been able to keep up with the pace of the recent jump, said Thomas Albrecht, managing director for transportation equity research at BB&T Capital Markets.

“The rise in diesel fuel prices in recent weeks is starting to be a big deal,” he said. “We are hearing more carriers begin to gripe because surcharges are reset each Monday and they have been lagging slightly.”

Increasing fuel prices will renew pressure on carriers to merge to cut other expenses, Albrecht said. Carriers are already seeing weak demand, which is driving down shipping revenue. That’s expected to persist between now and the end of June.

Carriers typically charge a base rate and then tack on surcharges for rising fuel prices and other expenses. Two big trucking companies, ABF Freight System Inc. and Old Dominion Freight Line Inc., recently started charging a $6-per-shipment surcharge for shipments in California because the state requires them to pay drivers for time spent fueling their rigs and rest breaks.

Oil futures that were below $30 a barrel in January have crept up in the past three months as usage increases in the U.S. and abroad. They are now 51% above the multi-year lows they hit earlier this year, said Phil Flynn, a petroleum analyst at Price Futures Group in Chicago.

Crude futures had plunged more than 70% through the end of last year as the global economy weakened – led by the slowest gross domestic product growth in China in 25 years, Flynn said.

The warmest winter on record in the U.S. also reduced demand for heating oils, which curbed oil prices.

More recently, however, signs of stabilization in the world economy have underpinned global commodity markets. The weaker dollar, down 4% in the past three months, also has improved demand for oil as overseas buyers have more purchasing power.

“It’s like someone flipped the switch and now demand is higher in every category,” Flynn said. “This comes at a time when refiners are doing their seasonal maintenance. The rebound in demand, the rebound in exports and the bump in oil prices all have [fuel] prices going higher.”

While rising demand for fuel means trucking companies will pay more for diesel, it also is an indicator that the overall economy is improving, which likely will translate into increased consumer spending on everything from cars to televisions, he said.

That, in turn, will mean increased cargo volumes for trucking companies, Flynn said. Owner-operators would probably be willing to pay higher fuel costs that they can eventually pass on to customers if it means increased volume, he said.

“It’s not all bad,” Flynn said. “Even though they’re paying more for diesel, at least they’ll have products to move.”

Diesel prices likely will continue to creep up through the rest of 2016, but not at the rapid pace at which they’ve been rising. Oil futures “look like they’re trying to stabilize” as drillers cut operations at production facilities, Flynn said.

The number of operating oil and gas rigs in the U.S. fell to 420 last week, the lowest since 1987, according to research from oilfield service company Baker Hughes. The international rig count, excluding the U.S. and Canada, last week declined to 985, the lowest level in almost seven years.

Lower oil and gas production may mean higher fuel prices, but eventually trucking companies will be able to pass those on to their customers, said Matthew Young, an equity analyst at Morningstar in Chicago. Transport companies, however, will have to endure some price pain until they can increase their surcharges.

“Over the long run, the impact of rising fuel prices is mostly, though not perfectly, neutral to carriers — as fuel costs rise, so will fuel surcharge revenue,” he said. “That said, in the short run, a trucker might see a slight rise in net fuel costs when diesel prices spike because of the lag in passing those increases through to customers.”