Businesses and organizations using large amounts of fuel need to address marketplace risks around pricing and fuel supply. The wholesale fuel markets can change rapidly with political, weather, and trading events.
This article is written by Shipley Energy’s Wholesale Fuel team and provides risk mitigation strategies businesses can put into place to better tolerate risk. Read on to learn more about these strategies.
Fuel prices are subject to significant fluctuations due to but not limited to geopolitical events, high frequency algorithmic trading, supply chain disruptions, OPEC decisions, and natural disasters.
Fuel resellers risk margin compression when prices rise rapidly, while end users may face higher operational costs.
Higher fuel prices may put stress on your credit lines, cash flow, or customer demand.
A backwardated market may negatively affect your inventory valuations or put strain on supply availability
Market & Price Mitigation Strategies
Fuel resellers have a natural hedge to gradual price fluctuations – they buy fuel, mark it up, and resell it. The risk lies in the holding period (when you buy vs. when you sell) and the volatility (how fast the market moves). To reduce these risks, you can:
Shorten your holding period through better inventory management. Ex: Don’t hold 50,000 gallons in storage if you only sell 10,000 gallons per week
Purchase what you sell. Do not back a CAP program sale with a standard fixed price fuel purchase.
Layer in your purchases for a weighted average cost of goods. This is a strategy that we heavily promote for our customers’ heating oil and propane price programs.
Protect your basis. As we have experienced in recent years, local (rack and pipeline) price basis can be exponentially more volatile than NYMEX futures. If you only hedge NYMEX futures, you are still exposed to rack and pipeline basis volatility.
Fuel end users do not have a natural hedge. They are exposed to a rising price fuel market, which may increase their operational costs.
Add a variable fuel surcharge that gets passed along to your customers based on the cost of diesel.
If you cannot pass on a variable fuel surcharge to your customers, consider locking in a fixed price or a CAP price for your fuel. This takes the guess work out of your fuel budget. You can now price your product/service based a guaranteed cost of fuel.
Refinery shutdowns, pipeline failures, transportation strikes, cyber-attacks, or weather events can halt the delivery of fuel.
Even short periods of pipeline delays or temporary gaps in transportation can disrupt fuel availability.
Fuel shortages may impact your ability to meet customer demand, damage your company’s reputation, and negatively affect your profitability.
Supply Chain Mitigation Strategies
Supplier Diversification:
Establish relationships with multiple suppliers to ensure redundancy or work with a Wholesaler that has established relationships.
Partnering with suppliers that have redundancy built into their own business adds a second layer of security.
Inventory Management:
Maintain strategic reserves of fuel to buffer against short-term supply disruptions.
If you do not have enough storage for 10 days of demand (One pipeline cycle), make sure that your supplier has storage space at your local fuel terminal.
Transportation:
Develop partnerships with reputable logistics companies that have redundancies built into their business models.
How can Shipley Energy help?
Shipley Energy maintains positive, longstanding relationships with nearly every fuel supplier and reputable transportation company in our market area. By extension, our customers enjoy the benefit of this diverse network.
We also maintain strategic terminal and bulk plant storage positions throughout our market area to buffer any short-term supply disruptions.
Our in-house transportation team works directly with our supply team to ensure smooth customer experience during any type of market disruption.
Redundancies are built into every aspect of our business from supply origins to storage and transportation services. These systems are meticulously maintained to ensure that our customers are taken care of in any market scenario.
Contact Shipley Energy
The Shipley Energy Wholesale Fuels team is here to help your business manage its operational risk with pragmatic strategies. If you’re concerned about the marketplace, reach out – we’re happy to to have a conversation to see if and where we can help you take potential risk off the table.
