Disruption in the global oil supply chain sends shock ripples across the energy economy. Explosive attacks on Saudi Arabian oil refineries spur fluctuations in oil prices, just as hurricane season threatens North American energy production. Shippers navigating the day-to-day transportation environment can ill afford to respond to short-term oil market dynamics with knee-jerk transportation strategy shifts.
Partnerships leveraging optimal shipping strategies enable organizations to limit the risks that emerge during periods of volatility – even when unpredictable global dynamics are in play.
Producing roughly 10 percent of the world’s fuel supply, Saudi Arabia’s industrial capabilities are susceptible to political uncertainty. Attacks on Sept. 14 at two Saudi oil operations, one at a processing facility in Abqaiq and one at an oilfield, threaten a significant impact to production. The expected loss of 5.7 million barrels per day translates to 5 percent of global oil supplies. According to the International Energy Agency, this global supply disruption is the largest in history – exceeding both the loss of output in Iraq/Kuwait in 1990 and during the Iran Revolution in 1979.
Following weekend refinery attacks, morning trading for benchmark Brent crude oil futures spiked prices about 20 percent – more than $11 a barrel – before steadying near a 10 percent increase. By afternoon, prices climbed again to $70 per barrel, a 15 percent hike.
That spike is the largest increase of its kind in three decades – dating back to the 1991 Gulf War. The Organization of the Petroleum Exporting Companies (OPEC) and Russia both announced plans to tap into reserves, according to the Wall Street Journal. Saudi Arabia also pledged to deploy oil stockpiles to keep global markets supplied while it rushes to repair damage at two affected sites.
Although the United States imports about 630,000 barrels of oil per day from Saudi Arabia, down about half from 2017, North American diesel price volatility reflects global events. Still, shippers do not need to panic at talk of gas price spikes, even when energy pricing analysts leveraging retail truckstop sales predict significant price spikes during overnight periods.
Planning to Avoid Price Panic
While sharp price hikes sometimes spur panic, the reality is shippers and carriers are riding the same fuel price roller coaster. All carrier fuel agreements are driven by the U.S. Energy Information Administration’s Diesel Fuel Price Index, which is adjusted on a weekly basis. After unrest in the Saudi oil supply chain spurred concerns of price hikes, the Sept. 16 price update raised on-highway diesel fuel prices $0.016. That likely changes again with the Sept. 23 update.
When diesel prices go up, fuel surcharges go up, and vice-versa. Trying to negotiate those fuel costs with carriers – especially during times of price volatility – creates new risk for additional costs elsewhere. Your transportation provider is going to recoup the cost it takes to move freight. Beating them up on fuel is wasted effort – and it could damage your relationship.
Fuel cost fluctuations are inevitable, but the impact of those increases across your operation does not have to be a sure thing. While you cannot control the price for diesel or the cost increases that accompany event-driven changes in the energy economy, you can control your supply chain in ways that protect your profitability.
By leveraging data-driven analysis completed with proprietary applications and the industry’s leading commercially available technology, shippers can gain the supply chain visibility needed to identify performance improvement opportunities. Often a third-party logistics provider (3PL) with Enterprise Logistics capabilities delivers shippers a full suite of services that can protect bottom line profit while managing fluctuating risks stemming from uncontrollable events.
Whether using a leading Transportation Management System to select least-cost, best-service options, or applying deep industry experience to constantly mind the pulse of the market, Transportation Insight is a trusted advisor that helps clients prepare optimal transportation strategies and then quickly pivot supply chain processes and execution when disruption arises.