Wholesale fuel buyers have many tools available to enhance sales profit margins and directly impact a distributor's market growth. Speculating, hedging, and forward buying are all necessary strategic components, if a fuel wholesaler intends to be a winner in today's highly competitive environment. Managing the risk of these three components separates well run jobbers from those that are just a few bad decisions from being forced into bankruptcy.
Many wholesalers shy away from the first component of speculation. This might be the best decision for smaller jobbers who cannot afford to hire a competent trading department. For those who do have the necessary capital, hiring a seasoned team of paper traders allows the business to receive a lucrative revenue stream, that should be able to produce profits regardless of which direction the energy complex is trending.
The next component, hedging, encompasses a broad range of techniques to offset the inherent short position that all fuel wholesalers are positioned. If a jobber has not made a refined product purchase prior to the start of the day's delivery schedule, the jobber is short the market. An increase in spot prices will decrease profit margins. A very simple strategy would be to buy physical product and sell an equal amount in futures or options contracts, when spot basis is unusually low. Allowing spot basis to rise to satisfactory profit margins, then buying back the contracts and selling the physical product, will juice profit margins.
The last strategy tool in the fuel buyer's arsenal, buying forward, requires accurate macroeconomic forecasting. Buying forward contracts whether they be indexed or fixed price based, will pay huge dividends if the timing is right. The risk of entering the contracts at the wrong time may be offset by staggering effective dates and utilizing a variety of combinations of indexed and fixed price contracts.
No wholesale fuel buyer has a crystal ball on the future. However, every fuel buyer has many opportunities to implement profit enhancing strategies which will add value to each gallon sold.
Saturday, November 21, 2009
Saturday, November 14, 2009
Strange Times Creating Stranger Correlations
As the energy complex has emerged from the ashes of the financial meltdown, strange correlations have developed. Stock prices and treasury yields, normally moving in opposite directions, are both moving higher together. Consumer discretionary stocks and energy prices, normally inversely correlated have recently been moving higher together. Will market participants be able to continue keying off these unusual relationships in the months ahead to improve trading profits?
In a normal economic environment, higher energy prices trigger discretionary consumer stocks lower. When consumers have to pay more for gas, they cut back on non-essential goods. However, a very unusual correlation developed since crude prices bottomed out on March 9th of this year. The price of crude and the price of consumer discretionary stocks have risen in tandem. Crude has risen 60% off this year's lows. The S&P consumer discretionary sector has risen 80%.
One of the main reasons we are seeing unusual correlations, such as treasury yields and stock prices both moving higher, is directly due to the Federal Reserve's flood of liquidity. When the economic recovery begins gaining traction and the Fed pulls back on liquidity, correlations will begin to return to normalcy. Until that happens, these strange correlations will continue and astute traders will be able to squeeze a little more juice out of their trades.
One major caveat for energy traders to heed. Commodities always eventually price back to supply and demand. Always have a hedging strategy in place or ready to implement when these fundamental forces return.
In a normal economic environment, higher energy prices trigger discretionary consumer stocks lower. When consumers have to pay more for gas, they cut back on non-essential goods. However, a very unusual correlation developed since crude prices bottomed out on March 9th of this year. The price of crude and the price of consumer discretionary stocks have risen in tandem. Crude has risen 60% off this year's lows. The S&P consumer discretionary sector has risen 80%.
One of the main reasons we are seeing unusual correlations, such as treasury yields and stock prices both moving higher, is directly due to the Federal Reserve's flood of liquidity. When the economic recovery begins gaining traction and the Fed pulls back on liquidity, correlations will begin to return to normalcy. Until that happens, these strange correlations will continue and astute traders will be able to squeeze a little more juice out of their trades.
One major caveat for energy traders to heed. Commodities always eventually price back to supply and demand. Always have a hedging strategy in place or ready to implement when these fundamental forces return.
Saturday, November 7, 2009
Anticipatory Hedging for Profit Margin Enhancement
In these times of extreme competitive retail pricing of refined petroleum products, fuel buyers need to find creative ways of enhancing profit margins. Being willing to take on appropriate cash price movement risk can be a creative profit strategy tool.
When a cash market participant has a very definitive position on future price movements, he would be wise to speculate by unhedging a small percentage of his cash position. The key to success is having a thorough understanding of local market historical pricing.
All successful trader/hedgers have access to local market cash pricing trends. When a proven re-occurring price pattern is discovered, determine what level of risk the firm is able to comfortably accommodate and allow a predetermined percentage of a cash position to ride with the market unhedged.
High probability, low risk trading is essential for giving your firm the competitive edge necessary to prosper in these difficult economic times.
When a cash market participant has a very definitive position on future price movements, he would be wise to speculate by unhedging a small percentage of his cash position. The key to success is having a thorough understanding of local market historical pricing.
All successful trader/hedgers have access to local market cash pricing trends. When a proven re-occurring price pattern is discovered, determine what level of risk the firm is able to comfortably accommodate and allow a predetermined percentage of a cash position to ride with the market unhedged.
High probability, low risk trading is essential for giving your firm the competitive edge necessary to prosper in these difficult economic times.
Sunday, November 1, 2009
Energy Risk Management and 13th Century Mathematician Leonardo of Pisa
Energy risk managers would have a much easier life if they knew for sure when one trend has ended and another has just begun. Are there any reliable tell tales that may help with this task?
The US dollar relationship with the energy complex, along with a 13th century Italian mathematician, Leonardo of Pisa, may provide the insight needed.
The energy complex has been moving this year in an inverse relationship with the US dollar.
This week the US dollar recovered most of October's losses, gaining 300 points vs. the euro. This retracement from $1.50 to the $1.47 handle coincides with a powerful Fibonacci ratio. Fibonacci ratios, explored and popularized by Leornado of Pisa's work, Liber Abaci, are powerful in currency trading because investors tend to take profits or put on new positions based upon whether the "Fib" ratio provided directional support or signaled continuation of a trend by not holding directional resistance.
Currency traders will be watching this $1.47 level to see whether the dollar can significantly close below this "Fib' support number, signalling the strengthening dollar will continue, and allowing traders to place trades ahead of the massive economic data coming out this week.
For traders who prefer ignoring the technical patterns and would rather rely strictly on the fundamentals, pay close attention to Federal Open Market Committee comments coming from Ben Bernanke on meetings ending Wednesday of this week. Any talk of interest rate increases, will send the US dollar sharply higher and energy prices lower.
The US dollar relationship with the energy complex, along with a 13th century Italian mathematician, Leonardo of Pisa, may provide the insight needed.
The energy complex has been moving this year in an inverse relationship with the US dollar.
This week the US dollar recovered most of October's losses, gaining 300 points vs. the euro. This retracement from $1.50 to the $1.47 handle coincides with a powerful Fibonacci ratio. Fibonacci ratios, explored and popularized by Leornado of Pisa's work, Liber Abaci, are powerful in currency trading because investors tend to take profits or put on new positions based upon whether the "Fib" ratio provided directional support or signaled continuation of a trend by not holding directional resistance.
Currency traders will be watching this $1.47 level to see whether the dollar can significantly close below this "Fib' support number, signalling the strengthening dollar will continue, and allowing traders to place trades ahead of the massive economic data coming out this week.
For traders who prefer ignoring the technical patterns and would rather rely strictly on the fundamentals, pay close attention to Federal Open Market Committee comments coming from Ben Bernanke on meetings ending Wednesday of this week. Any talk of interest rate increases, will send the US dollar sharply higher and energy prices lower.
Subscribe to:
Posts (Atom)