Effectively Managing the Fuel Market

As gasoline prices trend upward, retailers are struggling to stay competitive on price while protecting their margin.

By John Lofstock, Editor.

The cost of fuel has been roaring up and down like a rollercoaster, and so has the risk to retailers when purchasing fuel in large quantities. Fortunes can be made by accurately predicting which way the market will swing, but very few retailers can afford to have a tank full of gasoline underground when the retail price plummets.

One way that chains are mitigating risk is with software that helps them optimize fuel inventory, decrease operational expenses like unplanned split loads and reduce the costs related to scheduling and managing fleets.

The average price for a gallon of gas nationwide on July 29 was $3.710, according to AAA—nearly a dollar higher than a year ago, when the average was just $2.744. California’s average has hit $3.817, the eighth highest in the country, but one of the state’s lowest rankings in years. That price, though, is 66.7 cents higher than it was a year ago.

According to AAA, though gas prices are rising very little, pump prices remain 50-70 cents higher than they were in the summers of 2006 and 2010. The summer of 2008 saw the average price at $4.50.

Republican Rep. Fred Upton of Michigan, chairman of the House Committee on Energy and Commerce, predicted in late July that that gasoline prices would rise beyond $4 per gallon in 2012 as the Obama administration continues to slow down or even stop production in the Gulf of Mexico. The White House, he added, was dragging its feet on approval of an oil pipeline from Canada. He also presented statistics showing America’s production at roughly seven million barrels per day, and its demand about 19 million barrels.

Riding the Rollercoaster
“When the companies I work with predominantly—the petroleum distributors—see the NYMEX (New York Mercantile Exchange) street price drop $1 or $2 on a Tuesday they sort of wait to see if that price reduction shows up at the rack,” said Dan Gilligan, president of the Petroleum Marketers Association of America (PMAA). “A lot of retailers say, ‘Don’t bring me a delivery today because I just saw the crude price drop and I can make it till tomorrow.’ So you get the whole downstream down below the rack price as that whole group watches the prices closely.”

Indeed, the rack prices move almost uniformly with NYMEX, so if the price of crude jumps $1 a barrel the industry is most likely going to see the wholesale price go up by 3-4 cents a gallon within five or six hours.

Software to help optimize fuel inventory and decrease expenses can prove an important part of any operator’s strategy, Gilligan agreed, although the size of the operation will determine how much benefit is derived.

“If you’re sizeable, a 20-40-store chain, you should have enough information to see what the local rack prices are doing, how they’ve moved that day and how you expect them to move,” Gilligan said. “This puts you in the position to make an informed guess.”

Smaller operators, however, have less ability to react to variations in market prices. “The two- or three-store operator pretty much has to take the delivery today that he’s scheduled to get because the distributor only has so many trucks,” Gilligan explained. “If his inventory is low, he’s going to get a delivery that day no matter what the NYMEX price has done. It’s just the dynamics of the market.”

Gilligan’s advice is old-school, but effective. “Be diligent about trying to stay abreast of what’s happening in the futures market.”

Volatile Commodity
The volatility of the fuel market will always make it difficult to manage, said Fred Rozell, director of retail pricing for the Oil Price Information Service (OPIS) in Wall, N.J. “It’s something that you have to be on top of all the time.”

One possible result of rollercoaster pricing is that operators get pressured, sometimes savagely. “You have to be able to weather the waves that come in,” Rozell said. “A lot of consumers don’t understand that when wholesale prices are jumping, retailers can get caught buying fuel at a high price and trying to compete with another chain that may have bought at a low price. It creates a lot of tension in the market.”

On the other hand, when prices dropped, many of those same operators gained the ability to make some money. “While you have to weather those storms when the volatility is upward, you can really benefit when the volatility is downward,” Rozell said.

Temporary Relief
As a licensee with major gasoline brands, Pittsburgh-based Handee Marts Inc. doesn’t have the opportunity to reduce risk. “We have a jobber license with Exxon, BP and Gulf, and also with Valero with a couple of stores in Ohio. Once we sign that jobber agreement we’re not in a position where we can do anything to mitigate the rollercoaster,” said Ed Szalankiewicz, director of gasoline and maintenance for the 63-store chain. “We basically are obligated to buy the rack price that they offer to us, take it or leave it.”

Jobbers do sometimes give Handee Marts temporary rebates or other reductions to help the chain through a market crunch, something Szalankiewicz said they are not doing at present.

Szalankiewicz and his fellow Handee Mart executives have looked at a couple of the major software programs designed to help optimize fuel inventories. “We liked them,” he said. “It’s just that we’re not big enough with 37 gas stations for us to get any ROI on it,” Szalankiewicz said. “I haven’t looked at the cost recently, but we looked at it two years ago and it was prohibitively expensive for our size operation.”

Handee Marts currently sells three million gallons a month. “You need to be over five million gallons a month before it begins to make sense,” Szalankiewicz said.

For now, Handee Mart manages everything with in-house programs. “I created something called the WAM program, for Weighted Average Margins,” Szalankiewicz said. “It is a spreadsheet that we designed years ago and have tweaked over the years. It’s just a program we use in-house to keep track of what’s going on.”

Managers collect and review a lot of detail every day, and because the management team includes someone like Szalankiewicz who can be functionally involved, the optimal purchase price for fuel in not something that’s going to be missed. “We have a professional here who will look at gasoline marketing all day long and competitive pricing all day long,” Szalankiewicz said. “That’s how we manage it right now.”

The next level of review for Handee Mart will come when and if gas sales reach five million gallons. “Then we would look at the software programs to assist me in what I do,” he said.

Rozell, of OPIS, noted that his best advice for the months ahead is watching the wholesale prices and making decisions based on that. “If you’re seeing prices rise, make sure you’re trying to fuel up as much as you can to get your inventories at a certain price so you’re not left holding the bag when the prices peak,” he said.

 

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