How intraday monitoring of fuel prices can translate into fuel cost savings

Welcome to the second installment of a comprehensive series covering best practices to incorporate into your business for improved fuel management. Our team of industry experts are committed to sharing insights and strategies that will help you mitigate your exposure to market volatility, effectively manage fuel contracts, and make informed decisions regarding your fuel purchases and sales. 

In this article, we explore the significance of having access to intraday pricing to help you stay ahead of critical market shifts, mitigate sudden price fluctuations, and share best practices for managing exposure to market volatility.   Read part one on the importance of a well-written fuel contract.

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Over many years in the fuel business, I have heard people that buy and sell fuel say, when asked about markets – “I don’t know why prices are moving.” Maybe they do not realize the multiple refineries that have key producing units serving their markets are down. Or they do not know that one of the main pipelines that ships fuel from the spot market to the rack market is ‘prorated’ or possibly even shut down. In other words, they cannot articulate why prices are moving higher or lower. They do what most fuel buyers or fuel sellers do – they go about their daily job and do not focus enough time on fuel buying or selling best practices.

That is a mistake – for most fuel buyers, fuel is the second leading expense in their business next to payroll. For fuel sellers – fuel is their business, and not knowing why markets move up or down can leave them behind their competition. Having access to intraday fuel price movement is imperative to buyers and sellers. It provides visibility into the ‘Fuel Price Influence Chain,’ allowing you to get in front of critical market price shifts.

Understanding your ‘Fuel Price Influence Chain’ is easy

The first step is to understand what the Fuel Price Influence Chain (FPIC) really is. FPIC is an easy-to-understand sequence of market events that happen every business day – 365 days a year – that affects the price of fuel. 

There are 3 distinct pieces to the Fuel Price Influence Chain. They are:

Futures prices (NYMEX) – prices “on paper” where fuel is bought and sold for a period in the future
Spot Prices – physical fuel prices in one of seven major U.S. Markets
Rack Prices – the price at the distribution terminal where fuel is loaded

NYMEX:

Let us start with the futures prices for gasoline, diesel, and crude oil that trade on the New York Mercantile Exchange, otherwise known as the NYMEX. The NYMEX is a futures market – not a physical fuel market. It is government regulated and allows fuel buyers and sellers to purchase fuel ON PAPER to “hedge” their physical fuel costs. Not everyone buys futures, but unquestionably, it is the most influential part of the fuel price influence chain. Anyone who is serious about monitoring fuel prices looks at the NYMEX first! 

Source: New York Mercantile Exchange, 2020

Spot Prices:

Spot prices can be confusing, but here is a great way to think about it: These are physical fuel transactions with at least 25,000 barrels or 1-million gallons in quantity. The fuel is sold at one of the seven major U.S. refining hubs. They are:

1. New York harbor
2. Gulf Coast
3. Oklahoma / Group III
4. Chicago
5. Los Angeles
6. San Francisco
7. Pacific Northwest

Spot prices do not trade at an actual flat price - they trade against that NYMEX. A typical trade for Gulf Coast ULS might be -3.25cts versus the April NYMEX, which comes out to a pure cash price of $2.77 – per gallon. When you – the buyer or seller – look at intraday prices on a Ticker, you want to see that calculated price, and what the change is from the prior day. That tells you what your rack price is going to be tomorrow.

Argus Spot Ticker

Do most typical fuel buyers purchase spot? No, they don’t.

Why? Because the volumes are so large, most typical fuel buyers do not have that kind of storage. And most of the fuel buying community is not set up to trade on a pipeline, which is how fuel is shipped from the spot market. Those that do buy spots are among the largest integrated fuel producers and largest fuel distributors, also known as jobbers, in the U.S.

Rack Prices:

This brings us to the third and possibly most important piece of the fuel price influence chain, and one that affects all buyers and sellers – rack prices.

There are approximately 400 fuel storage terminals in the U.S. They are called racks because an 8,000 - gallon truck pulls up to the loading ‘rack’, as shown in the image above. Knowing which rack your fuel comes from and which of the seven spot markets supplies those racks is critical.

Why does this matter?

Having visibility into the first three pieces of the Fuel Price Influence Chain – the NYMEX, your Spot Market, and your Rack Market is critical. NYMEX and Spot prices move all day – morning through late afternoon. If you want to improve the way in which you buy or sell fuel, having visibility intraday price movement is critical.

For example, let us say that I buy ULS No.2 at the Atlanta rack, which I learned is supplied by the U.S. Gulf Coast spot market. So, going by our FPIC, I know that the day’s NYMEX movement will affect the Gulf Coast spot, which will affect the rack price. If on any given day, I see that Gulf Coast spot ULS prices are up 10cts gal by lunchtime, I can try to quickly dispatch trucks before the rack price goes up later that day. Conversely, let us say that Gulf Coast Spot ULS drops by 10cts gal – I can now choose to wait until tomorrow to buy fuel because the rack price in Atlanta will likely be lower. Remember – NYMEX affects Spot affects Rack.

Intraday prices, which are available on Tickers like the Argus Spot Ticker, are pivotal to having a well-thought-out fuel buying program. Tickers show the movement in spot prices and offer quick, easy-to-understand news and analysis of what is making markets move.

The Argus Spot Ticker keeps you on top of every market move with real-time intraday pricing for gasoline, diesel, ethanol, and RINs across all seven major spot markets.

Included in every Argus Spot Ticker:

• Up-to-the-minute, verified gasoline and diesel fuel prices in all U.S. spot markets with clear indications of market direction.
• Four daily "benchmark freezes" to provide an insight into the closing Argus spot numbers.
• Customize the view that's right for you - see the markets and products that matter to you.
• A constantly updating road fuels newsfeed that sits alongside prices, so you can quickly see what news is driving the market up, or down.
• RINS and Ethanol prices - included at no extra charge.