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.
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