Betting on Hedging

Published in CSP Daily News

Dwelle details exploration of futures market

LAS VEGAS -- For Nella Oil Co., California's historically fickle fuel markets drove this jobber/retailer to explore hedging, a concept frightening to many but a medicinal relief to petroleum's daily pricing headaches.

It's something we were forced into as a survival technique, Walt Dwelle, Auburn, Calif.-based Nella's managing general partner, told some 100 retailers Wednesday during a NACS session called Managing Gasoline Price Volatility: Is Hedging Right for You?

Joined by OPIS President Brian Crotty and OPIS hedging instructor Elaine Levin, Dwelle, despite his state's infamous [image-nocss] reputation, echoed the sentiment of scores of operators frustrated by chronically dwindling retail gasoline margins and offered some hope to lift annual gallon margins by a penny or two.

Operator of 48 stores and 25 cardlocks, Nella was seeking ways to boost profitability of its unbranded portfolio, whose price differential with branded was narrowing to frightening insignificance. We need to find a way to lower our branded prices, he said.

The solution, albeit one that is still in the relative trial period, was to invest in futures. If the current price is near the top of the normal range, we want to be at the low end of our futures holdings. And if the price is near the bottom of that range, we want to be at the high end of our holdings.

That said, he added there are opportunities when retailers should consider speculating. For example, once Katrina hit and wholesale prices soared, Nella increased its futures gasoline position, benefiting the way refiners were and helping to offset lost margins on the retail side.

It's that mindset"the ability to act like a refiner or major oil company"that Levin said is the crux of certain kinds of hedging.

At its core, hedging is about reducing the highs and lows"the whims of the daily fuels markets. At its best, such as Southwest Airlines amazing hedge securing its fuel product at less than $1 a gallon, hedging can deliver retailers significant competitive advantages and price stability. Simply put, she said, Many companies cannot handle the volatility of fuel on their bottom line. It's usually too late to do anything once prices have already started skyrocketing. So be proactive.