Richard Larkin

Hedge Solutions , Inc .

Should you be looking at outsourcing the purchasing function of your daily oil needs ? If I were addressing this question 20 years ago , the answer would be , “ What are you — nuts ?” The supplier relationships back

then were sacrosanct ; the result of generational bonding between the company reps . as well as the supplier brand itself . Though that bond has certainly faded over the years , it is still an important connection . Today I would say yes , it should be considered , but caveat emptor ! Outsourcing the physical daily oil purchasing to an aggregator , or broker is a place we advise clients not to go . It doesn ’ t mean you shouldn ’ t consider paying for advice , we just prefer not to get between the client and their suppliers . This relationship is sacred for a number of reasons . Your supplier does more than just put oil in a tank for you to procure at their rack . Your suppliers give you a credit line , albeit typically over a short window , 5-10 days . They also take on risk , bringing product into the terminals and having that supply on hand when you need it . That function , particularly in a backwardated

Chart 1

market , is critical to the supply chain . If the oil supply gets tight , you ’ ll want that relationship to be intact for both supply and credit terms . In other words , they ’ re unlikely to have a sympathetic ear if you are looking for better terms or simply need a load of oil if you ’ ve been outsourcing your oil purchasing to an aggregator who has been beating them up for a quarter cent every day .

All that said , there are functions in the pro- curement process that we believe you can substantially benefit from by getting advice from a professional . On the physical side you may want to reach back into the past ( I ’ m talking your granddaddy ’ s company here ) and consider a supply contract . Only not as open-ended as the supply agreements from long ago . Today ’ s supply contracts are typically tied to an index like Platts or Argus . This number is likely in close proximity to the price your supplier is paying . Typically indexed to the New York Harbor price , it gives you pretty good basis protection if the local rack basis blows out . It ’ s not perfect , but short of committing to a Nymex plus basis deal , it ’ s the next best thing . Before you commit yourself to this binding agreement you will want to back test the offer . This means comparing the Argus or Platts deal to your historical rack prices . Both Argus and Platts data are not cheap , so you should vet this with either your supplier or a consultancy . We subscribe to both publications and have access to historical data . Not all supply agreements are equal . Study the data !

It makes sense to outsource your procurement for other reasons . You wear a lot of hats which makes it difficult to track oil prices throughout the days and weeks . While tending to the daily fires that come up in the heat of the heating season , it ’ s likely you ’ ve overlooked redundant arbitrage opportunities . The supplier portals offer great opportunities to lock in physical prices for days at a time , but I rarely find buyers taking advantage of and using option strategies that not only cover the risk but

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can augment the advantage further . This is where I find the greatest advantages for outsourcing both the purchasing and hedging to a professional . It ’ s not just the proficiency and experience that offers an edge here . Continual monitoring throughout the day will often result in opportunities that the oil company owner / manager won ’ t see while putting out fires or taking care of customers . Most oil companies view their oil purchasing through limited vantage points ; the rack price and the close of the daily Nymex price . They likely are not monitoring basis or price movements throughout the day . Nor should they . In the realm of daily responsibilities that need their attention , it doesn ’ t make sense to spend all day watching oil prices fluctuate . Though I am hardly an objective observer here , I ’ m confident that I can make a sound argument for considering the enlistment of an advisor or advocate . After 30 years of advising on product acquisition and hedging , I ’ ve seen enough data as well as success ; my only surprise is that more companies are not looking at using the futures market and supplier portals to improve their margins . These opportunities are always there for the taking . Unfortunately , energy marketers have been trained over the years to look at pricing in a singular dimension .

Here is just one example : Chart 1 shows the Nymex spot price action for the month of January 2024 . There is a whopping 37 cent price move between January 8 and 28th of the month . It would be a stretch to assume that anyone could have predicted the price move over this 3-week period . A quick glance at Chart 2 shows just how volatile prices have been this winter , with prices moving in both directions . Meanwhile , if we zoom into the circled area ( January 18-24 ) covering 6 days , the price movement looks noticeably flat on a daily basis . However , if we look at the same exact period ( chart 3 ) and examine the price action in 30-minute intervals , we see a lot more price movement .

A quick glance to the left ( January 15-16 ) shows a significant dip of over 12 cents in just 2 trading days . We also know that it is unlikely that retail prices have dropped in this 2-day period , which means the retailer is realizing a windfall in the margin . Now let ’ s assume the retailer , seeing this gain in margin , goes to the portal and locks

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