Should I be Hedging?

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Should I be Hedging?

Hedging in the Form of Fixed Price Contracts

Fuel Hedging can make sense for fleet-based companies looking to reduce fuel price volatility and achieve some expense stability.  The most basic form of fuel hedging, and the type that makes the most sense for fleets, is a fixed forward contract. Using a fixed forward contract will protect a fleet-based company from fuel price increases during the contract's life. It is easiest to think of this as fuel price purchase insurance that insulates the fuel buyer in a rising fuel market. This same contract will also penalize during a falling fuel market, but it can be a valuable tool in the bulk fuel buying portfolio when given proper consideration.

 

When Does it Make Sense to Hedge?

Using a fixed-price contract can help reduce the risk involved with bulk fuel buying in volatile markets. For example, if you have a fixed-price contract in place for six months at $2.50 per gallon, and the price rises to $3.00 per gallon, you only pay $2.50 per gallon. Conversely, you would still pay your contracted rate of $2.50 per gallon even if the prices fell under your rate. Understandably, the goal is to negotiate a rate that will save throughout the contract, helping to insulate your organization from rising market conditions. A fixed-price contract should only be considered with consideration to the overall supply portfolio for the business.

 

What Does Your Fuel Portfolio Look Like?

Managing the fuel supply portfolio for fleet-based businesses is critically important. In most cases, fuel is the top expense line item after headcount. Understanding the fuel buying needs of the organization is the first step in establishing a fuel portfolio. It includes determining the average fuel purchases across locations and any seasonal spikes and valleys, along with the fleet's makeup and an understanding of where your business is heading. Once the supply basics are fully understood, establishing fuel contracts with suppliers is essential to maintain a stable supply for your fleet. The contracted amount with suppliers will typically be 80%, with the remaining 20% left available for spot fuel purchases when market conditions are favorable. A fixed forward contract can be an excellent additional tool for fleets that actively manage their fuel supply portfolio.

 

Managing Risk and Budgets

Reducing the risk of going over budget with fuel expenses is a genuine concern for fleet-based operators. Using a fixed-price contract smartly can be a great way to help achieve price stability with this expense. To fully support your business, fuel contracts and fixed-price contracts must be considered carefully in the larger context of the business, as contracts that do not support the company correctly can have a devastating impact on profits.

 

Getting the Right Help When You Need It

Fleet-based businesses depend on fuel to operate, but fuel is not their business. The fuel purchasing departments for fleet-based companies tend to be small, limiting what they can accomplish. These small departments are likely doing an excellent job of purchasing reasonably-priced fuel and keeping full tanks to support the fleet. However, entering into contracts based on a fixed price can be costly if not done correctly. If you are unsure of the right move related to your fuel contracts, the team at Insite360 would love to discuss it with you. The fuel purchasing team here at Insite360 manages substantial fuel portfolios for our customers, using advanced techniques to manage fuel portfolios for customers. Our fuel purchasing and logistical experts would love to discuss the fuel supply needs for your organization and recommend strategies to support your business goals.

 

 

 

Kyle Cumings
Manager, Supply at Insite360

Kyle Cumings is a manager of the Fuel Center RFP and Financial Management Teams. He has a passion for reducing overall fuel procurement costs by focusing on contract pricing, supply sourcing, inventory levels, invoice accuracy, taxes, and more. Kyle has spent 7 years in the downstream fuel industry focusing on reducing fuel price risk exposure and optimizing fuel purchasing programs. Before joining Insite360, Kyle held his Series 3 – National Commodities Futures License.

 

 

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