On the surface, buying fuel based on a rack price report seems straightforward: find the lowest price for the product you need, and then buy it. But there are circumstances when the absolute lowest price may not be the best choice.
The complexities of buying refined fuels are far too many to explain in a single blog; people who have spent years in the industry are still learning new tips and tricks. But for brevity’s sake, here’s a quick, four-step guide to purchasing refined fuel products in today’s competitive downstream energy market.
1. Maintain relationships
If you’ve guaranteed product to a customer, your fuel purchases must account for that obligation. Runouts happen, of course, but repeated instances of not fulfilling a commitment will lead to lost business — and revenue. Be sure to tally up any owed deliveries and apply them to your order.
2. Don’t make assumptions
It’s unwise to go too far into the future. Yes. A longer contract is more affordable, and generally, predictability is valued in business spending decisions. However, consider the scenario of someone signing a three-year refined fuels contract in 2019.
Consider the scenario of someone signing a three-year refined fuels contract in 2019.
No one knows what the future holds. When will the war in Ukraine end? What about trade tensions with China? Will OPEC+ make a significant production move? Those are just a few geopolitical considerations. There are more immediate ones as well. For example, will you dispatch your own trucks to lift, or is the supplier delivering? If it’s the latter, you need to ask about freight costs.
This is why it pays to look beyond the bottom line and ask questions.
3. Listen to your team
Your pricing analyst knows the market better than anyone else. Let’s say you see that supply at a terminal is low. It could be because that product is in high demand. However, it could also be because they were over-supplied and are having a fire sale. Your people working in that market have the details and context you need to make the best decision possible.
4. Time is of the essence
Hours matter when evaluating prices to make a decision. The gap between when a rack average price is locked in versus when it’s published can be several hours — even up to 10 hours. This is what’s called a decision dead zone; there can be no execution of strategy because of missing data. An even more concerning question: what are your competitors doing during this time?
The gap between when a rack average price is locked in versus when it’s published can be several hours — even up to 10 hours.
In addition, prices change often, so the rack price might actually be cheaper than the contract price. It’s important to watch the clock and keep track of prices during the day. If you’re using a benchmark for your underlying contract price, you need a report that coincides with the time the contract price is effective.
Also, the present is one thing, but the past matters, too. Look into your purchasing and lifting histories. Was there a time when you didn’t have product that you could’ve sold? Did such an occurrence happen on a pattern that repeats? The discoveries can lead to a reduction in risk and an increase in profitable opportunities.
Again, this isn’t intended as a comprehensive guide to contract fuel buying. But by following these four guideposts, you’ll be well on your way to more profitable purchase decisions.
If you’re looking for faster, more accurate rack price reports, DTN has a solution that could save you money. Learn more at our FastRacks page.