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Information about Central Oil Supply and all of its divisions.

Fuel Risk Management: What it is, and Why it May be a Game-changer for You

Jennie McRae - Tuesday, February 04, 2020

What is Fuel Risk Management?

Fuel hedging is a contractual tool some large fuel consuming companies, such as airlines, cruise lines and trucking companies, use to reduce their exposure to volatile and potentially rising fuel costs. A fuel hedge contract is a futures contract that allows a fuel-consuming company to establish a fixed or capped cost. The companies enter into hedging contracts to mitigate their exposure to future fuel prices that may be higher than current prices and/or to establish a known fuel cost for budgeting purposes. If such a company buys a fuel swap and the price of fuel declines, the company will effectively be forced to pay an above-market rate for fuel. If the company buys a fuel call option and the price of fuel increases, the company will receive a return on the option that offsets their actual cost of fuel. If the company buys a fuel call option, which requires an upfront premium cost, much like insurance, and the price of fuel decreases, the company will not receive a return on the option but they will benefit from buying fuel at the then-lower cost.

Why Hedge?

Hedges are particularly popular with companies that have exposure to certain markets, such as commodities or interest rates. For instance, airlines and railroads spend substantial amounts for fuel for their operations, and so hedging future fuel costs can protect them against a spike in the market price for energy products.

Oil and gas exploration and production companies provide a useful example of this use of hedging, as some players in the oil-rich shale plays like the Bakken and Eagle Ford hedged their anticipated future production and therefore earned huge gains on their hedge positions because of the plunge in oil prices on the open market during late 2014 and 2015. Those companies that didn't hedge, on the other hand, face the full impact of the crude oil drop, and some are struggling to get the capital they need to keep operating.

If you purchase bulk fuel, pre-booking your fuel may be something to strongly consider. Firstly, this program can help you minimize your exposure to the volatile fuel market; secondly, this program can help you establish an estimated fuel cost for the upcoming year. And ultimately, you will be better able to manage your operating costs when you use this program to budget fuel expenditure. Simply put, with Fuel Risk Management, you are guaranteed a budgeting tool that is a lifesaver for some of our customers; some of them even see savings as a result of pre-booking their fuel with Central Oil.

If you don’t know where to start, we recommend you booking 50-75% of your anticipated usage.

Fuel Risk Management FAQ:

  • What types of fuel can be booked?

Clear On-Road Diesel/Dyed Off-Road Diesel/Jet-A

  • How big is a transport load?

7,000 Gallons

  • How long do I have to take the delivery?

You will have an entire month to take the load you have booked

  • How much should I book?

We recommend booking 50% -- 75% of your anticipated usage

  • When is the deposit due?

Deposit is due at the time of contract execution

  • When can I book?

We encourage customers to use our FRM Program as a budgeting tool (before their fiscal year-end). However, you can book at any time of the year!

  • How many types of contracts are there?

Fixed Forward

Collar Option

Max Price

(fool.com; Wikipedia.com)

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