Are Large Fuel Consumers Missing Big Opportunities?
Recently, we worked with one of our partners, PwC, to host a refined products webinar focused on market trends and business challenges for fuel consumers, fuel marketers, and fuel refiners. Over the next few weeks, we will cover key points made in the webinar, as well as ways to transform your business for the future by utilizing resources such as ETRM software to navigate growth and changes in today’s environment. This week, we will start with the key challenges fuel consumers face, as well as market opportunities.
Market Volatility vs Stability: Deciphering When to Hold and When to Fold
The refined fuels industry has experienced some extended periods of relative oil price stability, but then, intermittently, some periods of very high price volatility. The biggest challenge to overcome here is actually during those stable periods because market participants naturally become complacent and accustomed to low volatility impact.
When fuel hedging programs create losses or when they are perceived to incur too much cost to administer during periods of relatively stable prices, participants usually decrease their level of hedging activity. This typically sets those participants up for unfavorable earnings impact when volatility returns to the market. The airline industry, for example, is experiencing this very scenario due to jet-fuel prices surging to more than 50% over the past year. This has pushed carriers to raise fares and airlines like Delta Airlines to cut profit expectations, according to The Wall Street Journal.
Volatility creates both downside risk and upside opportunity for commercial fuel consumers, as well as other market participants. If you look at the downside risk portion of the equation, it’s necessary to first define whether you really have exposure to changes in fuel prices – to what extent and when you don’t have exposure. For example, if changes in fuel price are easily passed on to your customers through the structure of your business or if you have fuel price escalators built into your contracts, then there is a degree of structural protection from the risk of market price volatility. If this is the case, then the key activities necessary are managing the timing of purchases, minimizing inventories, and tightly balancing fuel supply and consumption to remain in balance. Bottom line: It’s not just typical hedging in managing volatility, it’s also in the way you structure pricing and contracts and inventory.
If you have limited or no ability to pass price increases to your customers, you clearly have price exposure. In this case, you now have to not only consider what your organization wants to do, but also the behavior of your competitors when market volatility picks up. If you aren’t taking advantage of market volatility and hedging against it, your competitors are likely taking advantage of your pricing. When analyzing your competitors’ behavior, here are some questions to consider:
- Do your competitors hedge their fuel costs?
- How do your competitors treat hedge gains and losses?
- Do your competitor’s processes for hedging gains and losses affect the pricing behavior to their customer base?
- Do your competitors seem to use fuel cost advantage or hedging cost advantage to undercut your pricing and gain market share?
Regardless of which situation you’re in, it’s critical to have accurate, real-time information on your own fuel supply and demand, risk exposure profile, and the ability to quantify the existing profile of your exposure to market price changes.
Market Opportunities in the Midst of Chaos
Volatility and price dislocations create options for you to reduce supply costs by changing the location of your purchases and changing the pricing basis for those purchases. A perfect example for this is an airline that practices fuel tankering, in which it decides to refuel in different spots along the flight route based on index and spot prices.
There are many options available and levers you can pull in cases of volatile prices. But again, to take advantage of this type of opportunity, you need to have access to ETRM software with real-time market price feeds, up-to-date information on your own demand, more granular forecasting, and faster updates on your own in transit and in-tank inventories. All too often, we see that legacy processes and outdated technologies leave large fuel consumers flying blind on their real-time supply decisions, which then prevents them from capturing these market opportunities and managing their risk profile.
In order to effectively manage portfolio risk while also taking advantage of market opportunities, fuel consumers must have full, real-time insight and analytics on its portfolio value chain. If you are a fuel consumer and want to learn more about how Allegro’s ETRM software can help you do just that, click here to contact us.
Stay tuned for next week’s blog post in this series!