There’s nothing like a financial scam to send a shiver down the spines of those who were not victims themselves, but suddenly sense vulnerability unnoticed before. “It could have been us. It could have been us,” sound the silent alarms.
The well-publicized case against a major fuel provider earlier this year accused of cheating customers on their fuel purchases was just such a wake-up call. It caused many fleets to determine it was high time to assume tighter control over their own fuel purchasing, but where to begin?
Long-time fuel industry veteran Scott Berhang, director of client relations and education for the Oil Price Information Service (OPIS), recently offered a one-hour webinar on how to successfully manage fuel purchasing, even in today’s volatile marketplace. In the Fleet Owner webinar, sponsored by WEX Fleet One, called “Demystifying fuel purchasing,” Berhang shared seven key steps for taking control of fuel buying once and for all. (If you wish to view the webinar, it is available for free at this link: http://fleetowner.com/demystifying-fuel-purchasing.)
“If you think you are immune from what happens [in the marketplace], you are not,” Berhang said. Too many fuel buyers operate as though they were still living in a time of stable and predictable fuel prices; however, today’s prices can now jump or plunge by 5¢/gal. to 20¢/gal. several times a day—and this volatility is not going to go away. Smart buyers need to contractually position themselves to obtain consistently fair prices from suppliers, in any market environment, he noted.
To begin, fleets need to answer a few baseline questions about their current fuel buying practices, including:
- Do you buy fuel cost-plus or retail-minus?
- Do you have a contract that is fair for you?
- Does that contract have a cost basis or benchmark?
- Do you know how to verify that you are being charged the right price?
- Do you know if you are a “ratable” fuel buyer? (A ratable buyer is a buyer who purchases fuel regularly, usually more than once per week. The more fuel you buy, the more ratable you are and the more leverage you have when it comes to price.)
Step One: Understand your local market and where your fuel comes from
According to Berhang, the first step in establishing a solid fuel purchasing program is to understand which fuel distribution terminal(s) the fuel you buy comes from. There are some 400 fuel terminals or “racks” in the U.S. and the more places you buy fuel, the more racks you have to understand.
Each rack is dominated by one or more suppliers, so even when racks are not far apart geographically, the prices can vary by as much as a nickel a gallon depending upon those suppliers and other factors such as proximity to a pipeline or a port.
Step Two: Understand the fuel specifications required in the market(s) you serve
In the past, fleets could pretty much buy their diesel or gasoline anywhere in the country. It didn’t matter. Today, the fuel market includes many “boutique” fuels (think CARB diesel and gasoline, Texas LED, ultra-low sulfur diesel, biodiesel blends, etc.) created to meet specific regional regulations. According to Berhang, this adds complexity and contributes to market volatility. “It is critical for every fuel buyer to understand what fuel is required at which terminal,” he stressed.
Step Three: Read and update your contracts with fuel suppliers
“I can’t tell you how many buyers are still working off contracts that are 10 or more years old and have incorrect language regarding fuel specificity and price/cost basis,” Berhang said. “Read your fuel contract. Don’t get into something you can’t amend or change.”
For starters, he recommended fleets check to make sure that their contract specifies the correct type or types of fuel that have to be provided for legal operation. Berhang also recommended that all fuel contracts be revisited every two to three years, especially if you are a ratable fuel buyer.
Contracts should also spell out the benchmark or cost basis for the agreed-upon fuel pricing to avoid confusion or misinterpretation. Benchmarks are published, third-party prices provided by companies such as OPIS or Platts. They may be based upon rack prices or spot prices (see Step 5) and set daily or several times per day. For example, a cost-basis reference might read: “Based on the OPIS contract (10:00 a.m. ET) gross ultra-low sulfur distiller price for Atlanta, GA.”
Finally, when you are invoiced, take the time to verify that the prices you were charged are correct according to the established benchmark—a must.
Step Four: Educate yourself
If you buy fuel every day, or several times a week, or if you are in charge of the group that purchases fuel, you should have a basic understanding of market direction, noted Berhang. “Take five minutes every day and ask yourself, ‘What happened in the markets yesterday?’ ”
Step Five: Understand the market “influence chain” that drives fuel prices
This is the real key to being a better fuel buyer, according to Berhang. The “Influence Chain” is the chain of events that occurs that cause your fuel buying prices to rise or to fall, he explained, and “as you become a smarter, more educated fuel buyer, understanding this chain of events will help you time your purchases better.”
The New York Mercantile Exchange (NYMEX) is at the top of the influence chain. It is where traders buy and sell various oil futures, mostly for hedging purposes. NYMEX prices almost instantly affect physical “spot market” prices at the seven refining hubs in the U.S. where huge amounts of fuel are traded. These changes, in turn, affect rack prices at the 400 rack locations in the U.S.—usually by the end of the same day. More than 300 rack or terminal prices are tied directly to one of the spot markets, Berhang explained. Changes to actual prices at the pump usually lag behind rack price changes by two or three days, but other factors may also affect area retail prices as well.
“As a smarter fuel buyer, you should identify not only which rack(s) your product comes from, but which spot market supplies that rack,” he advised.
Step Six: Read the fuel market industry news
Keeping on top of fuel market news, especially news about refineries, is critical to fuel purchasers, said Berhang. The easiest way to do that is to subscribe to a price discovery data feed.
Planned or unplanned incidents (called turnarounds) at refineries can have a huge affect on supply. Buyers who carefully track the news can react more quickly to events that cause price spikes and supply shortages.
Step Seven: Reassess your fuel buying program
Berhang urged all fuel buyers to constantly reassess and revise fuel programs. He also recommended hedging. “If you are a ratable buyer, the best way to protect yourself from volatility is to hedge. “Hedging” or risk management is not speculating. To not hedge is speculating,” he said.
