Welcome to the sixth installment of our seven-article series covering best practices for optimizing fuel management in your business. In this installment, we will delve into the significance of updating your fuel procurement approach, particularly if your fuel consumption is increasing. Our final article with explore a topic that often instills fear - hedging!
Our team of industry experts are committed to sharing insights and strategies that will help you mitigate your exposure to market volatility, effectively manage fuel contracts, and make informed decisions regarding your fuel purchases and sales. Be sure to catch up on part five for valuable information on the importance of identifying your local market.
Throughout my years of teaching a fundamental fuel buying class called “Winning Fuel Buying Strategies,” I encountered a diverse range of participants from various sectors of the fuel industry, including suppliers, refineries, and businesses of all sizes. The most fascinating past of the class was the introduction, where each person would share information about their business, annual fuel consumption, and their expectations from attending the class.
On one occasion, I met three individuals, a gentleman and two ladies, who were clearly from the same family. When I asked them about their business, they responded, “We own car washes with gasoline stations.” Naturally, I was curious about their fuel consumption and was astonished when they said, “400 million gallons per year.” After confirming the quantity, I inquired about their goals for attending the class, to which they replied, “To improve our fuel buying practices.”
These siblings had recently inherited a substantial business and were astute enough to recognize that they were still using outdated fuel procurement methods.
What does the “old method” mean?
It refers to the same approach they had been buying fuel for the past three decades, where the person currently purchasing fuel was trained by the predecessor, who was trained by someone else. It took a fresh perspective from the new management to acknowledge that fuel, as one of their largest expenses, required a makeover in their procurement practices.
One recurring theme throughout this series has been the inadequate allocation of resources by fuel buyers and sellers, especially when it comes to fuel procurement. Many buyers, like my car wash friends, eventually realize that fuel is not a static commodity like pencils, pens, laptops, or office equipment. Fuel prices are extremely volatile, and it is not uncommon for prices to fluctuate significantly within a short period. If you purchase large volumes of fuel, you are probably in the fuel markets EVERYDAY. While riding the market may work temporarily, it is not an efficient long-term strategy.
So, what exactly does a makeover entail? Here are some areas where you can start:
- CONTRACT: Examine your existing fuel contract(s) with supplier(s). Ensure you locate your contract and have both a fuel industry expert and lawyer review its terms. Prioritize understanding your contract situation.
- VOLUME: As your business expands and fuel consumption increases, leverage your purchasing power to negotiate better deals with suppliers. Remember, suppliers value your business, as it enhances their negotiation power with their own suppliers.
- SUPPLIERS: It is highly likely that you have not explored all available fuel distributors in your market. Contact your state petroleum marketers association to obtain a list of distributors in your area. Initiate conversations and inform them about your rising fuel consumption.
- STAFF: Strive to build a cohesive team and maintain stability within your fuel management department. Relationships are crucial in the fuel industry, and consistent team dynamics yield substantial long-term benefits.
- MARKET VISIBILITY: Large buyers often lack real-time knowledge of price shifts. Consider obtaining intraday and end-of-day price discovery from a reputable price reporting agency, also known as PRA, such as Argus.
- VARY THE PRICE TOOLS; While a lot of fuel prices are on a published rack price, the industry is moving more and more to formula prices that use spot prices published by PRA’s, such as Argus. This is commonly called “cost – plus.” As a tip – don’t adopt a formula price unless you have the kind of view into intraday market pricing that the Argus Spot Ticker affords.
In our forthcoming seventh and final installment, we will delve into a vital consideration for effective fuel procurement: the implementation of a price program or hedging strategy. Given the inherent volatility of fuel prices, abstaining from hedging amounts to speculative decision-making, potentially exposing your organization to unnecessary risks. Stay tuned for further insights on this crucial topic in our next article.
As a leading provider of price assessments and market analysis for all U.S. oil products, Argus offers comprehensive coverage of gasoline, diesel fuel, jet fuel, RINS, and ethanol. We pride ourselves on being a trusted partner in the refined products spot industry, providing our clients with reliable and accurate information on daily spot price movements to inform profitable decision-making. Our commitment to in-depth coverage and analysis enables us to deliver valuable insights that you can depend on to drive profits in your business.
For more information on how Argus can provide transparency and insights into the road fuels market, visit www.argusmedia.com/argus-spot-ticker or contact us at USdownstream@argusmedia.com.