This is the fifth installment of seven covering best practices to incorporate into your business for improved fuel management. Our industry experts share best practices to help you limit your exposure to market volatility, effectively manage fuel contracts and optimize your fuel buying and selling decisions.
As someone with over four decades of experience in the fuel business, one of my greatest joys is educating large fuel buyers on how to improve their fuel purchasing process. I have noticed that for many companies, fuel is an afterthought and viewed as an "evil necessity," rather than a critical component of their operations. Many companies fail to invest time and money to train their fuel buyers on how to purchase fuel correctly, which can lead to problems. It is not uncommon for someone with no experience in fuel buying to take over the responsibility of purchasing millions of gallons of fuel each year.
It is unfortunate because understanding some fundamental concepts can help anyone become a more informed fuel buyer. In previous articles, we discussed the importance of staying up to date with news that affects fuel prices, the importance of reviewing fuel contracts, and the fuel price “influence” chain – the series of events that causes prices to fluctuate.
In this article, we will discuss the importance of identifying your local market, which is critical for any bulk fuel buyer. Your local market comprises two essential elements:
- The "local" rack where your fuel is offloaded from a pipeline, and
- The "spot" market or refining hub where the fuel was manufactured.
To put it simply, fuel is manufactured at a refinery in one of seven bulk "spot" markets in the U.S. From there, it gets shipped through a pipeline to one of approximately 400 distribution points or "racks" across the United States. The fuel you receive at your location comes first from the spot market and then from one of those 400 racks, which forms your local market.
Why is knowing your local market essential for bulk fuel buyers?
Understanding your local market is crucial for several reasons.
YOUR FUEL CONTRACT: If you buy a substantial amount of fuel, you should have a fuel contract that guarantees your supply. The price point in your ontract should specify which rack (your local market) is the cost basis. Rack prices are published daily by various price reporting agencies, and the rack your fuel comes from and the publication it is published in becomes the basis for the price point in your contract.
YOUR LOCAL MARKET MAY HAVE MULTIPLE RACKS: Secondly, your local market may have multiple racks, even if they're only a few miles apart, each with different prices. For example, the metropolitan area of Los Angeles has multiple racks, including Carson, Watson, Wilmington, and El Segundo. A smart fuel buyer in the Los Angeles market will write into their contract that their fuel price will be based on the lowest price of the given day for any of the four racks mentioned.
If you know which rack(s) your supplier pulls from, you can write into your contract that you will get the best price on any given day.
Argus provides end-of-day prices that represent the entire day
Argus Spot Ticker delivers a thorough view of developments in all major spot markets. Customize your view to display markets and fuel categories streamlined to the business you manage.
How do you identify your local market?
To identify your local market, simply ask your supplier. A good supplier and customer relationship is transparent, and they should be willing to answer your question. If they do not provide a clear answer, it may be time to look for a new supplier.
Some fuel buyers do not buy at a posted price at one of the 400 racks. Instead, they buy at the rack on a "formula" price, such as "Argus Gulf Coast CBOB closing price + 4cts gal." In this case, your local market is the Gulf Coast spot market – NOT one of the 400 racks.
In summary, understanding your local market is the first step in becoming a more informed fuel buyer. While it is typically a rack, it can sometimes be a spot market. By taking this step, you can ensure that you are getting the best possible price for your fuel and are better equipped to manage your fuel purchasing process.
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.