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What You Need to Know to Save on Fuel Contracting
December 19, 2019
Written By Adam Buckallew
If you look back at the seasonal cycle of ultra-low sulfur diesel (ULSD) futures on the New York Mercantile Exchange (NYMEX) over the last 10 years, you can see trends that have historically led to great buying opportunities. Now, keep in mind that each year’s performance will always be unique to the circumstances at the time, and I’ll be referring to averages, but the data gives us a decent idea of what to expect.
Seasonal Trends
When looking back from 2009 to the present, we typically see prices begin to climb in mid-June and peak in mid-October. The average gain in value of this seasonal run-up over the last 10 years has been 31 percent. Prices then historically move lower until the end of December for an average decline of 22 percent.
Since June 2019, the NYMEX ULSD price has twice rallied to new highs and sold off to near the same lows. As of mid-December, the price moved higher and out of its trading range due to optimism stemming from the United States Phase 1 trade deal with China and the OPEC’s recent agreement to cut its crude production. Taking recent seasonal trends into consideration, this move higher is likely to be temporary as I expect the cyclical influence we typically see at the end of the year to grow.
What You Need to Know
As I have stated in prior columns and meetings, the best time to consider locking in the price of some of your expected fuel volume for the upcoming year is now. The stretch of time from November to March consistently offers you the most advantageous chance to book fuel for the upcoming season. This is when you need to be paying attention to the energy market and preparing to make a move.
If you want to be as informed as possible when you contract your fuel needs for the upcoming season, you need to do three things: estimate your total fuel volume needs, the timeframe when you will use your fuel and the average price per gallon you can afford to pay.
Fuel Contracting
Once you determine that information, you will be ready to ask your local plant manager for a quote on contract pricing. The length of contract can be set up for the timeframe that best meets your needs. After you get a quote, evaluate it in comparison to your per-gallon budget. Knowing what the potential contract values are today gives you a point of reference that you can compare against as the year progresses.
You also need to decide what percentage of your normal fuel needs you want to protect through contracting. We generally do not advise contracting for 100 percent of your expected fuel needs except in rare circumstances. We recommend you pick a percentage that makes sense for your plan for the next five months. The goal is not to try to buy the absolute low, but rather to lock in a price that best fits your budget.