Getting started in fuel buying can feel daunting. Unlike traditional stock market investments that can be bought and held for months or years as their values fluctuate, fuel is a physical product the value of which resides in its immediate availability; it cannot be stored for long. Its value can change by the minute, due to the wide range of market forces that affect supply and demand. Regional military conflicts, OPEC policies, and even local weather events can push prices up or down. Refined fuels (gasoline, diesel, jet fuel, liquid propane, etc.) are some of the most volatile investment commodities. However, it can be one of the most rewarding, with multiple opportunities to buy and sell throughout the product’s brief lifetime.
Because prices can change multiple times a day and vary from one region to another, successful fuel buyers rely on accurate and timely market data, like the information services provided by DTN ProphetX®. Request a demo today.
If you’re considering investing in the refined fuels market, there are some important concepts to understand.
Getting Started In Fuel Buying
The first step to getting started in fuel buying is deciding where you want to invest in the market. As with any other commodity, the fuel industry has a paper market and a physical market.
The paper market involves buying and selling contracts to produce fuel. A futures contract is a non-rescindable agreement to buy a certain quantity of fuel at a future date. An option gives you the right to purchase fuel, but you may eventually choose not to execute the agreement. When you buy fuel in the paper market, you help the refineries stabilize their operations, because you guarantee a sale for refined fuel products they have not yet made. But most fuel buyers in the paper market never actually accept delivery of the fuel. As prices fluctuate daily (or even by the minute), paper market investors look to sell their contracts at a profit to other buyers further down the supply chain, in the physical market.
In the physical market, you buy actual, refined fuel. It may be stored in tanks near the refinery or carried by rail, barge, pipeline, or road to bulk terminals operated by wholesale distributors located closer to retailers. Wholesale distributors buy fuel from refineries, then sell it to independent, chain, and franchise service stations. They may also sell to large factories with gas or propane-powered machinery and vehicles, or companies that own large fleets of trucks. And service stations sell fuel to individual automobile drivers.
Other fuels like liquid propane gas and heating oil take a similar route from refineries to home furnaces and other household appliances.
Know Your Role (And Your Goal)
The traditional stock market adage “buy low, sell high” doesn’t tell the whole story about fuel buying and selling. As an investor in the paper side of the market, you cannot buy a quantity of gasoline and hold indefinitely to wait for its value to increase. Once a futures contract reaches its delivery date, you may need an impossibly huge tank to store your investment. Instead, your role is to buy and sell the product before actual production, timed to the upward or downward movement of fuel prices.
You can exchange futures based on fluctuating market conditions that immediately impact product availability, such as the extreme winter storm that hit Texas recently. Or you may base buying and selling decisions on your predictions about long-term trends, such as the extent to which automobile driving will match or exceed pre-pandemic levels as more states expand vaccine availability.
In the physical market, you may work midstream at the wholesale distributor stage, where your job is to buy fuel at the lowest available price and sell it at a profit as quickly as possible. Dealing with a physical commodity at this stage, you need to make sure you don’t buy more than you can store. On the other hand, you can’t risk having your tanks run dry, either. So, you need to be aware of the demand generated by the consumers in your market(s) and how it may fluctuate depending on the day, the local weather, historical data, or events like holiday weekends when consumers do more long-distance leisure driving vs. short-distance commuting.
In another scenario: you may work downstream as a fuel buyer for a service station chain, a heating fuel utility, or a transportation company with a fleet of vehicles. You must consider similar market forces when deciding to purchase fuel; delivery when you need it, without exceeding your local storage capacity. You need to make quick decisions about purchase prices and time of fulfillment. You do not want empty tanks before a big travel holiday. Nor do you want full tanks when no one is buying gas.
Get And Use The Most Timely, Accurate Information
No matter where you are in the supply chain, you need reliable and timely data to make wise and quick fuel buying decisions. You cannot rely on gut feelings or news from last week. Fuel prices change in minutes, not days. News events reported in the morning can affect prices in the afternoon. A bad winter storm near oil fields can affect fuel deliveries days later and hundreds of miles away.
In the United States, the U.S. Energy Information Administration collects and disseminates impartial information to the fuel industry and the general public. The European Commission provides similar information about fuel markets across the EU.
What if all that information was in one place?
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