What is hedging? It’s a financial instrument to buy something in the future at a given price. In this case, we are talking about diesel fuel prices. Why would you want to purchase fuel today for the future? As this article is written, diesel fuel prices have been all over the map the last 6 months. Maybe some companies want a little predictability. Could they get lower? Sure. Could fuel prices go higher? Bet on it!

I am sure that you have heard the stories of how Southwest Airlines has done a terrific job with their fuel hedging program. They have a good fuel hedge program. It is a large part of what makes them profitable year in an year out. They take a large variable (fuel cost) off of the table when they manage their fuel cost by hedging. You still want to buy and manage your fuel program the best you can and hopefully with the Sokolis Group, but here is what a hedge might look like.

Your company budgets $3.75 a gallon for fuel. You don’t know, like any of the rest of us, if the price will go up or down over the next 12 months. You are able to buy a hedge (financial instrument) at let’s say $3.30 as an example for the whole year. This means you will not pay more than $3.30 per gallon. There are several different tools that can be used to work around this, but basically your buying an insurance policy to protect your company from an accident. The accident being the price of fuel skyrocketing back the $4.75 a gallon. That would blow your budget out of the water.

For more information, please email gsokolis@sokolisgroup.com.

It’s been said that what goes around comes around. Well, it may not be karma, but today diesel fuel prices sure look like they are coming around to lower levels. This week the DOE reported that the National Price for trucking’s most used fuel had fallen to $3.888 a gallon. There is still a several week lag in retail prices compared as compared to current wholesale prices. Simply put, anyone selling fleet fueling right now is making better margins today than they were two months ago. With the truck stops, retail stations and card locks trying to make as much as they can in profits right now, I would expect the retail margin to continue to drop down, but at a much slower rate.

Let’s take that out of your fuel management system right now and look at something other than straight fuel savings. Fuel managers or CFOs might call it a hedge. Others might refer to it as fuel insurance. As part of your fleet management solutions, I don’t care what it’s called. The reality is that you want to protect your company against increasing diesel fuel prices. For some trucking companies, the increase hits as a fuel surcharge, while private fleets typically can’t pass on a fuel surcharge so they need to be creative in a legal way.

Crude oil prices and diesel fuel prices rise and fall at basically equal levels for most people. For illustration purposes let’s talk about these fluctuations as they relate to crude oil. Clearly, if you are going to hedge for diesel fuel prices you are probably going to want to do that against heating oil since there is no contract to trade on diesel fuel. Over the last 10 months you can call it. We have watched crude oil trade at $78 a barrel in October, $91 a barrel in December, $84 a barrel in February, and $113 a barrel in late April. Currently at the end of June a barrel is priced at less than $93. Nationally, we were paying $3.00 a gallon for diesel fuel in October. Our fleet fuel cards have been burning ever since at $3.24 a gallon in December, $3.51 a gallon in February and $4.12 in May.

With all the global happenings including debt ceiling, financial turmoil in Greece, economic gloom and the hurricane season fast approaching, ask yourself if now is the time take your cards off the table and hedge your fuel cost for the next year at current rates. Or, should you wait a few more weeks and see if the prices get lower? Most people believe that $80 a barrel or $85 a barrel is a real number that could happen. Of course you never know what kinds of surprises can happen on the way down. Maybe Saudi Arabia becomes mad at the United States for releasing fuel from the strategic reserve when the Saudis said they would make sure there was plenty of crude oil to lower prices. Or, perhaps the spare capacity that the Saudis say they have isn’t really the number. What if it’s lower? And, what if more bad economic numbers come out and the crude oil prices go into the $70’s?

We could play this guessing game about where fuel prices will go all day long. Why do I think some companies should consider buying some fuel insurance? (I think it sounds better than the word hedge) Well, when the market is tight with supply like it is now, you should consider locking in some of your fleet fueling cost now. That way you can sleep a little better tomorrow. There is more certainty that prices will go up to $130, rather than drop down to $50 a barrel. So, until next time, keep your eyes on your fuel management program or hire someone that will.

The answer is yes. Now let me explain what I mean by that. Four weeks ago we saw crude oil prices plunge from $113 to $97 a barrel followed by a drop in diesel fuel prices at the pump, and in bulk fueling or mobile fueling where your company has a fixed margin over a benchmark price. Gasoline pump prices took a bit longer to go down, but they did, if only just a little bit. Then, as we check prices again now, crude oil is back up to $100 a barrel. So, what gives? Let’s talk about barrel vs. pump prices first. As I have mentioned time and time again, a $1 drop in barrel prices for crude oil usually translates to a 2 to 3 cent drop in diesel fuel or gas prices at the pump. So, since barrel crude oil has averaged a $13 drop in prices lately, diesel fuel prices at the pump should be at least 26 cents – maybe 39 cents, cheaper a gallon. If you follow the DOE National diesel fuel prices that are reported weekly, you noticed that on May 2, 2011 diesel was at its peak of $4.12 a gallon. Today, on June 3, just one month later, as I sit and write this, the DOE National diesel fuel price is down to $3.94. Which means you should see an 18-cents per gallon savings in our fleet fueling costs. But, it sure takes a long time for decreases in barrel pricing to get to the pump and actually realized as fuel cost savings on your bottom line.

When next week’s DOE fuel figures are posted on June 6, I expect lower crude prices and hopefully a bit more savings at the pump. After that, the $100 a barrel question is, “Where exactly will crude oil prices go?” Well, wherever they go, diesel fuel prices are sure to follow. And, economic data the past several weeks has not been pretty. I wouldn’t call it terrible, but it’s certainly not showing signs of an upward economic recovery.

Therefore, I ask again, why are crude oil prices staying around $100 a barrel? Perhaps because the Bulls are beating the Bears and this isn’t a football game. Crude oil is traded in U.S. dollars, so when the U.S. dollar is strong it puts pressure on oil prices to go lower. When the U.S. dollar is weak, like it has been, (just look at our elected officials trying to balance a budget) crude oil prices go up.

Ok, now don’t throw your arms up yet. Keep reading. The HSBC came out with a report that says Saudi Arabia needs crude oil prices around $90 a barrel to help meet their country’s financial demands, and to continue to have oil as a dominate energy. See, the Saudi’s don’t want electric cars or natural gas trucks. Why would they? They produce oil. They make a lot of money with oil.

OPEC will meet on June 8, just a few days away, to decide if they should increase the output of crude oil, and ease some pressure on the global supply. But, before the meetings begin, many of the delegates from the OPEC countries are speaking out and expressing their view point of view. “There is a need for an increase in production to replace the loss of supply from Libya,” the delegate said. “Oil prices are too high; $100 oil is scaring people.”

Saudi Arabian Oil Minister Ali al-Naimi waded into the debate, noting that OPEC is ready to raise production to meet any increased demand.

I’m not a gambling man, especially when it comes to betting on what other people are going to do, but I am going to roll the dice and say crude oil prices will be down at $85 to $89 a barrel by mid July. And yes, expect gas prices to fall another 30 cents and diesel fuel prices to do the same. They just won’t fall as quickly as the crude oil. Even if lady luck is not on our side, keep in mind, that regardless of what fuel costs are and wherever they may go, up AND down, the best way to save money on your fleet fuel is to call Sokolis Group.

I know many of you read these fueling blogs about fuel management and I hope you find them pretty educational. Yes, I admit they can be a little self-promoting.  Let’s face it, our dedicated staff of fueling experts deserve a little recognition. They are all working 50-60 hours a week focused on maximizing fuel savings for our clients.  Sure we like a little press now and then — we may even toot our own horn. More press leads to growth for our fuel management business and ultimately more money. I am not going to lie.  Our staff doesn’t work for free. But believe it or not, we only make money if we create and orchestrate fuel management systems that save money for our clients.

You should know that there are other companies out there that might claim to do something similar to what we do.  I have consulted for almost all of them at one time or another.  They DON’T do what we do.  Our fuel experts know more about fuel cards, fleet cards and related systems better than the people that work at the fuel card and fleet card companies.  We even walk the fuel card companies’ staff through the procedures of how to set up a fuel card.

We know what we’re doing, and we do it with excellent client contact. We call people back or send e-mails, TIMELY! See if you get that when dealing with a fueling company that wants to be the Amazon of fuel. They sell bulk fuel, diesel fuel additives, gas station business and subcontract mobile fueling companies to service their clients’ business. That old saying “a salesperson sells me and I never hear back from him again” might not go with everyone, but try getting an answer from them.

Mobile fueling companies that have card locks too.  They say they provide fuel management; do they?  Or do they provide diesel fuel to your clients?  What fuel management solutions are you providing to the client?  Fuel, what are the diesel fuel prices you are providing?  Reports?  Are they consolidated on all of their diesel fuel purchases or just what they buy from you?

Listen, maybe this column is easy for me to write about fuel card, fleet card, mobile fueling, fleet fueling companies that want to say they provide fuel management solutions for their customers because I am at a beach on vacation with my wife. Like my staff, I have a passion for perfection! No, I didn’t say we “are” perfect, but we do try hard to be.  Even if we do take a vacation.

Click through

http://www.xtranormal.com/watch/11248634/

Ask yourself this…  Does your fuel management department or fueling company care, understand or really try hard for you?  Do they really know what they are talking about?  I will be back in the office on Monday.  If your not sure, give me a call 267-482-6160, drop me an email gsokolis@sokolisgroup.com.