How to Minimize Your Risk with Rack Price Intelligence

As you know, there are many steps to converting crude oil into usable products, and each leg of the supply chain comes with its own added costs. Across each stage also looms the possibility of disruptions, which can hinder supply and further raise prices.

Domestically, events like hurricanes or refinery outages can disrupt local and regional markets, potentially with far-reaching implications. Recently, we have also seen significant disruptions from global economic factors, such as the Russia-Ukraine war, China’s renewed COVID-19 shutdowns, and the energy crisis in Europe. Events like these play a large part in determining tightness in the market, causing spikes in already-elevated prices.

It is no secret that buying and selling in the downstream fuel market is a low-margin business, where even the tiniest price change can dramatically impact your bottom line. With so many factors constantly driving prices, how can you remain profitable? All players in the supply chain — even the most experienced — must understand current market dynamics and pricing considerations to know how to hedge their risks.

 

Understand pricing dynamics along the fuel supply chain

The futures market was revolutionary for pricing refined products, allowing buyers and sellers, large or small, to simultaneously see real-time prices for crude oil, diesel fuel, and gasoline. The forum serves as a critical benchmark in setting refined fuel prices across the country, with futures contracts reflecting national and international supply and demand, macroeconomic, and geopolitical considerations. Futures contracts are financial instruments while buying and selling physical barrels occurs in the spot and rack markets.

Seven major U.S. regional spot markets

New York Harbor
Gulf Coast
Chicago
Group 3 (Oklahoma)
Los Angeles
San Francisco
Pacific Northwest (Portland)

Spot markets are where large, bulk refined fuel transactions — delivered by pipelines or marine vessels to terminals — take place. Spot markets trade at a premium, discount, or at parity with the relevant futures contract on what is known as a basis. Gasoline traded in the physical market is indexed against the Reformulated Blendstock for Oxygenate Blending (RBOB) futures contract, and diesel fuel, heating oil, and jet fuel are indexed against the ultra-low-sulfur diesel (ULSD) futures contract.

Spot pricing is the benchmark for suppliers in setting refined fuel prices at the more than 350 wholesale distribution terminals across the United States, in what is known as rack postings. These prices are published daily and can change more than once a day, especially in volatile markets. Highly volatile markets can lead to basis risk between the two markets, as evidenced by the volatility we have seen in 2022.

 

Pricing considerations you should evaluate

Amid all the known factors and available published prices, pricing managers have multiple responsibilities — from inventory control to ensuring their company meets customer obligations. In the process, the goal is to make a profit in a segment of the industry where competition can be fierce and margins thin.

At any given moment, pricing managers track:

  • Competition
  • Inventory levels
  • In-shipments
  • Market direction
  • Customer obligations
  • Energy news and transportation issues impacting prices
  • Macro inventory report and analysis
  • Weather

 

Mitigate risk when transacting refined products

The physical and futures markets do not always move in tandem, creating basis risk. Basis risk may also reflect differences in delivery times and locations or product specifications. It is also influenced by supply and demand conditions locally, regionally, and nationally, which can vary significantly.

Buyers and sellers frequently look to mitigate these risks through various pricing programs. One of the most common programs is a fixed price — a negotiated price and volume for a specific timeframe, which offers protection against rising market prices for buyers and falling prices for sellers. Other programs include a maximum price call/cap option that sets a ceiling price and volume for a specific timeframe, a maximum/minimum price range that sets negotiated ceiling and floor prices, and other options with varying price risk and supply protection.

Today’s risks and low margins highlight the importance of critical market intelligence for buyers and sellers alike. Our DTN FastRacks® solution delivers timely, highly-accurate rack prices in a cost-effective, accessible format. With it, you can better assess competitive fuel market positions throughout the day and discover opportunities to boost margins and profits.

 

Watch “Buying and Selling Fuel in the Wholesale Market”

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