SAN DIEGO – At the 2011 Government Fleet Expo and Conference the keynote speaker for Wednesday, June 8 was Denton Cinquegrana, Senior Markets Editor for OPIS. His presentation covered the topic of fuel management and planning strategies in today’s volatile market.
His keynote topic provided insights into the major factors affecting oil and fuel prices. One of the terms he used to describe today’s environment is “Petronoia,” which is people thinking that demand has finally outstripped supply. He said this isn’t the case, but that there are many other factors affecting oil prices today, such as geopolitical factors, commodity trading of oil, and local market conditions. For example, the price of the dollar impacts fuel prices inversely (as the price of the dollar falls, the price of oil goes up). In addition to this overview, he outlined seven strategies for purchasing fuel.
The first step is to understand your local market. In the U.S., there are 400 individual markets (commonly known as racks). Fleets that purchase fuel in volume should know which rack they are getting their fuel from. Depending on the rack, there can be a 3- to 5-cent variation in price, simply because of factors such as transportation costs or there being a greater, or smaller, number of suppliers in an area.
Next, he said you should know the fuel specs required in your market. With the wide range of fuel types available (one example includes CARB gasoline, a cleaner burning type of gasoline only available in California), the fuel a fleet needs for its vehicles can vary, which can affect the price.
After learning about fuel prices, Cinquegrana emphasized the importance of understanding, and updating, the fuel contract for a public sector organization. Some contracts are outdated. In many cases, it’s crucial to know what the fuel prices in the contract are benchmarked against. Some examples include whether it’s a weekly benchmark, a daily benchmark, which service it’s based on (OPIS, Argus, Platts, etc.), whether its cost basis is a gross or net price (gross billing means the customer gets a 1% discount if they pay within 10 days).
The next step is to educate yourself about fuel markets. With emerging markets using more fuel (China, India, etc.) and regional supply issues (the Middle East, for example), if you plan to purchase fuel by watching market prices, it’s crucial to pay attention to not just local market conditions but global conditions that can affect oil prices. That said, Cinquegrana noted in some cases there isn’t any good explanation for market volatility.
Next, he said you need to understand the “influence chain” that causes fuel prices to change. He said one of the most important markets to watch is NYMEX. From there, you can pay attention to cash spot markets, which include New York, the Gulf Coast, the Group 3 (near Texas), Chicago, and the West Coast, which includes Los Angeles, San Francisco, and the Pacific Northwest. Next in the influence chain are rack prices, and last are the retail pump prices, which typically lag behind the other markets.
Beyond paying attention to the “influence chain,” Cinquegrana said you can get a lot of insight from reading refinery industry news. He said refinery turnaround issues have a huge impact on supply, for example ramping up for the summer driving season.
Once you have all that knowledge, Cinquegrana said it’s important to reassess and reevaluate your fuel buying program so you’re purchasing in a way that makes sense for your fleet’s needs based on your geographic location.
Another topic he discussed was fuel hedging, which he said has benefits and drawbacks. He said if you’re a ratable buyer (i.e. have a bond rating), hedging is a good way to protect against price volatility.
His last pieces of advice included to remember that volume is king: the more you buy, the better the price you can get. Next, he said to review your fuel contract and update it to include any changes in local fuel specs. Lastly, he said to get news and price discovery information so you’re informed about changes in the fuel marketplace.
The full keynote presentation will be available on Government Fleet’s website after the event.
By Greg Basich