Cooler product is denser and carries more BTu than warmer product. For fuel suppliers and buyers, knowing the actual temperature of the product they are selling/buying is key information in managing profitability. Because local temperatures can have dramatic variations, the density of gasoline in a gallon can fluctuate by more than 2 percent over the course of a week at any given location – and more than 5 percent over the course of a year.
Failing to consider temperature variation can have an impact on your margins. This is especially true in northern states, where suppliers buy in bulk markets based on net, or temperature-corrected, volume but are required to sell and report to tax authorities based on gross, or actual, volume.
For example, let’s say it’s a typical January day somewhere in the north. For every gallon a supplier buys on a net basis, they’re only able to sell .97 gallons on a gross basis. If a supplier doesn’t properly adjust the sales price per gallon to account for temperature, they could easily lose money on every gallon sold.
Experienced marketers have a general feel for the net-gross spread and are able to make rough price adjustments. Currently, it’s nearly impossible to get adjustments ‘just right’ when the temperature – and thus the net/gross spread – vary, sometimes dramatically, every day.
The net/gross spread is even harder to determine when you are negotiating contract sales. Historically, contracts contained a single temperature correction factor designed to “cover” the term of the contract. Today, many contracts adjust monthly based on the historical monthly temperatures. Neither of these methods are accurate. In fact, this variation is such a problem that some suppliers and refiners refuse to market their products in gross-gallon states because they lack an effective tool to adjust their pricing based on temperature fluctuations.
The new DTN Temperature Correction Index (TCI) is your single source of accuracy for products sold throughout the country. The DTN vast data retrieval network provides the ability to calculate the TCF for all products at all terminals, every day. Using DTN TCI buyers and sellers will no longer guess at temperature correction factors, they will use facts. For more information on this product, click here.