As businesses continue to look for ways to increase profitability, it stands to reason that they will take a look at their profit margins. While total sales and revenues are important to understand, profit margin is one of the best ways to get a clear picture of the financial health of your business.
Understanding your profit margin can help you make better business decisions, including changes to fuel pricing or operational adjustments.
So, what exactly is the profit margin? It is represented as a percentage: the ratio of profits to revenue. For example, imagine your business brought in $500,000 in revenue. However, not all of that revenue goes towards profit – there are operating expenses, taxes, and the cost of goods that eat into that revenue.
Therefore, if these costs amounted to $100,000, your profit margin would be 80%, meaning that 80 percent of your revenue goes toward a profit. Not only does this help you see how much money your business is generating, but how efficiently it is earning money.
There are ways to increase your profit margin. For example, streamlining operational processes by receiving fast, accurate data from DTN FastRacks can reduce costs and increase productivity in your business. This data also allows you to intelligently adjust your pricing to remain profitable and competitive.
Oil prices play a huge role in your profitability as a fuel supplier, so understanding the market is essential in protecting your profit margin.
3 factors that affect oil prices
The oil market is subject to the same volatility and ups and downs as any other market, mostly related to changes in supply and demand. Of course, to remain profitable, a business needs to understand the key factors affecting oil prices and plan accordingly to protect its profit margin.
The world learned a lot of lessons during the COVID-19 pandemic. For businesses and investors in the fuel and gas industry, it underscored the tremendous impact world events can have on oil prices and the world market.
For months, businesses were shuttered, flights were grounded, and millions of workers across the globe started working from home, all but eliminating the daily commute. This shutdown led to a huge imbalance in oil supply and demand levels, resulting in an unprecedented plummet in oil prices – all the way down to negative numbers.
On the flip side, with the vaccine rollout leading many businesses to reopen and a slow increase in travel, 2021 saw oil prices rebound to nearly $85 a barrel in October. Of course, this is an extreme example of how world events affect oil prices. But even more regularly occurring events (such as political unrest in the Middle East) impact oil prices as they affect global supply and demand.
Seasonality of gas prices
Many commodity prices tend to be seasonal, and the refined fuels market follows a similar pattern. Since the majority of refined fuel products are consumed in the Northern Hemisphere, refined fuel prices tend to follow the Northern Hemisphere weather patterns.
For example, gas prices are often lowest during the winter months following the holiday season, gradually rising through the spring. Summer leads to an increase in travel, increasing demand, and raising prices. Generally speaking, gas prices tend to peak by the end of summer/start of fall, and decline after Thanksgiving as winter begins.
Weather patterns can have an effect on both supply and demand for oil. When temperatures are extremely low (e.g., during a sudden polar vortex expansion) demand for heating oil produced from petroleum increases and thus leads to a rise in crude oil prices.
Supply can be affected by extreme weather as well. Hurricanes or other adverse weather can shut down or damage refineries, halting production or disrupting the supply chain. The resulting decrease in supply (or the worry that this may happen) can also raise gas prices.
How can hedging protect your fuel-pricing profit margins?
Hedging is an investment strategy used as protection against a potential loss. It is used by both market buyers and sellers to minimize the risk of price changes in the future. It’s possible to hedge all or a portion of your production against loss, allowing you to effectively budget and manage your finances, providing a measure of consistency and confidence in an otherwise volatile market.
Here are two common hedging strategies that can be used and some pros and cons of each.
A swap contract is an arrangement to exchange cash flows at the end of different settlement periods during the contract duration. There is no upfront cost paid for this contract, but money is exchanged depending on the difference between the floating price (current market rate) and the fixed price (amount set forth in the contract.)
If the market price of oil is higher than the contract price, the producer makes a payment to the other party. If the market price is lower, the producer receives a payment from the other party. This payment would offset losses for the producer if oil prices were to drop. However, the producer would be unable to benefit if prices were to rise higher than the contracted price.
Put option contracts are another method used by producers to hedge against losses. Like a swap contract, the producer can receive payments to offset losses if oil prices were to drop below the fixed price in the contract. However, there’s a key difference: unlike swaps, “puts” do not obligate the producer to complete the contract if prices exceed the fixed price.
Using options allows the producer to both protect himself from decreasing prices and to benefit from price increases. Of course, this type of flexibility comes with a price. The producer must pay an upfront premium to enter an option contract, which cuts into the potential profits of the contract.
Protect your profit margin with DTN FastRacks
It can be challenging to predict and react to fuel market fluctuations. But actionable insights make the job easier. DTN FastRacks provides fuel producers with superior market intelligence to help improve their bottom line.
Designed specifically to meet the needs of fuel sellers, FastRacks has the information and insights you need, including:
- Real-time price alerts
- Comprehensive data compilation
- Market closing reports
- Position analysis
Put the data experts at DTN to work for you – try out a free demo today!