Hedging Your Fuel Margins
Published in CSP Daily News
NACS Show: How Wall Street can protect retailer profits
ATLANTA -- It's not a new story for petroleum marketers: between swipe fees, decreasing demand and rising wholesale costs, fuel sales are making life tough for a lot of retailers. This topic was the center of discussion at the 2013 NACS Show educational workshop, "Protecting Retail Margins & Volatile Times."
"I talk to a lot of retailers who say they're operating in the red-zone sometimes when you take out the credit-card fees," said Brian Norris, the session's moderators and associate director of retail pricing for leading petroleum pricing firm, OPIS.
According to Elaine Levin, president of Washington-based financial firm Powerhouse, the United States is consuming less petroleum thanks in part to the recession as well as fewer drivers on the road with baby boomers retiring and new drivers waiting longer to get their licenses.
On the plus side, there is plenty of stock, as advancement in technology has the United States producing more crude oil than it has in decades.
"Regretfully, high supplies and low demand has not translated into big profits, because gas is a global market," Levin said, noting that the recent crises in Syria and Libya all had an effect on the international petroleum market. "Even though we have our own sources of crude oil, it's not enough to offset what's on in the world. We are not immune to the latest headlines."
The market grows even more volatile when you look at the refineries' perspective. According to Levin, refineries tend to profit most when the wholesale price increases, squeezing the retailers' margins. It created a nasty cycle: at the end of the year, fuel margins tend to be great for retailers and bad for refineries, meanwhile in the spring--when most refineries do their maintenance work--the wholesale price increases meaning poor margins for retailers.
"Either you are first to raise the price and suffer lost volumes or you stick it out and have endure margins," Levin said of the springtime crunch.
However, there may be another option for retailers who choose to invest wisely in the futures market--which is what firms such as Powerhouse do.
"We put you and your futures account in the profit profile of the refiner so that as the wholesale price goes up and the refining margin goes up, money comes into your futures account to offset the loss of retail profit margins," said Levin. "We basically turn it into an integrated oil company on paper, without all the headaches of actually buying a refinery."
When a retailer's profits go up, typically they're losing money in these futures account. This is why Levin emphasizes that retailers should view themselves as hedgers, not speculators in these investments.
"If you're truly hedging, your goal isn't to profit, but protect your margin," she said, likening the investments to car insurance. "You're trying to avoid the risk of unfortunate market prices affecting your bottom line. If you have a risk in your business, typically you have money in your futures account to help offset costs."
And although there is certainly a lot of research and investment that goes into the process, it has helped retailers grow their business, even during turbulent times.
"With this option, retailers don't have to be as worried about protecting margins," said Norris. "You're not forced to raise [gasoline] prices because you have money from the futures account."