Online purchasing that enables more timely spot buying is now also helping to reduce risk associated with purchasing for their forward price protection programs, some fuel oil dealers said.
“Five years ago or so the market really started to move quicker than you could communicate to the customer,” said Ian Cook, vice president of operations for C.E. Kiff, Delhi, N.Y. “A smaller dealer needed to have more of a real-time picture of what they were purchasing in fuel.”
Cook and other dealers said they were making use of a recent enhancement to an online service long offered by Sprague Operating Resources, a wholesale supplier based in Portsmouth, N.H. The company has helped dealers manage price volatility via online purchasing for years, said David Daoust, Sprague’s managing director, but most of that activity centered on day-to-day “prompt” purchases. In December the company added a feature to the online service, designed to help dealers better manage the risk associated with their forward price protection programs, Daoust said.
Typically, retailers are exposed to significant margin risk as they balance customer sales with hedging instruments of a different size – forced to lock in hedges in NYMEX-stipulated 42,000 gallon minimums and increments, Daoust noted. The new online service offers dealers the ability to hedge customer-sized volumes, Daoust said.
“After the 2008-2009 heating season, our customers were looking for a way to minimize the risks associated with their forward price protection offerings,” Daoust said. “We designed the Small Volume HeatCurve and have made it available on Sprague Real-Time [the online service] to meet that need,” Daoust said.
The supplier had long allowed retailers the chance to lock in fixed prices and volumes on a degree-day weighted “curve,” spread out to match heat load demand patterns, but the required volumes were high, Daoust said. When the curve was first implemented in 2004, it was for a minimum volume of 210,000 gallons, Daoust recalled. That sizeable minimum meant that a large number of homeowners needed to be grouped together. Locking in forward price contracts under those circumstances could be an anxiety-provoking task.
“It was risky to decide whether to buy wet barrels before a sale to the customer, or make the sale first and then buy,” said Charlie Uglietto of Cubby Oil in Somerville, Mass. “I could never seem to find a way to quote and hedge a customer at the same time. Meanwhile the market kept moving.”
Over the years, Sprague drove down the minimum purchase quantities from 210,000 to 126,000 to 84,000 gallon increments. Now the curve allows dealers the chance to lock in a weighted average purchase price for as little as 1,000 gallons over a variety of different winter delivery schedules – essentially one customer at a time, Daoust said.
Uglietto said the small increment “has already changed the way I handle my price protection program. My sales staff uses the system to generate a price quote for a customer without worrying about a volume mismatch, and with the click of a button, my order gets filled.”
The flexibility afforded by the program can help oil dealers strike a deal with a customer where previously they might not have been able to, said Dennis Koch of Lipton Energy, Pittsfield, Mass. “A customer recently missed one of our pre-buy programs, but wanted to buy-in,” Koch recalled. Using the small volume feature, Koch said, “I was able to offer him a deal for 2,500 gallons. He agreed, paid me by credit card and I turned around and locked in the confirmation with Sprague. It was simple for me and resulted in a very happy customer.”
In March, Sprague added an instant messaging (IM) or “chat” feature to the online service, enabling dealers to bid, negotiate and close a deal via IM, said Grant Brown, vice president of investor relations and marketing. “It connects with our folks on the trading floor,” Brown said. “That allows them to go back and forth, and talk about the bids and pricing in real time.”
Of the online purchasing capability generally, John Cook, president of C.E. Kiff, said, “You get a real-time, live-market quote without having to call someone and wait for their return call. You can just log onto the website and all the information is right there.” That is helpful when looking at forward months, Cook said. “If it’s December and you want to contract something for February or March,” he said, the real-time market price is visible. “You can buy it at the market price,” Cook said, “or put a bid in if you think the market is going to go down. So if you’re going to buy something two months out, and you think the market is going down a couple more cents, you would put a bid in for that [lower] price and you could set an expiration date and leave that bid out there till it expires.”
Previously, Cook said, “If you were looking at a forward month you would have to call and tell somebody how many gallons you wanted to purchase and they would have to call you back with a price. If they were real busy, you might not hear anything for ten or fifteen minutes and by then that price might have changed.”
The online enhancement eliminates that back-and-forth, with its potential for delay and lost opportunity. “You see the price, you know what it is and you can buy it or you can put a bid in,” Cook said. “It frees up a lot of time.”
Ian Cook of C.E. Kiff said the new online feature allowed the company to come up with a contract price for customers year-round, instead of only within a limited-time offer. “In the past we would only offer a program to the customers for a sign-up period of one month,” he said. “If they missed the program [sign-up period] for whatever reason they were just going to pay the market price,” Cook said. “Now a customer can come in November or April and ask us for a price program and we can do it.”
Ian Cook noted that the capability to execute small-volume forward contracts is beneficial to C.E. Kiff’s commercial diesel fuel customers as well. Those customers include off-road diesel customers, such as excavating and construction companies, and farms, and on-road diesel customers such as trucking companies.
C.E. Kiff started as a feed dealer in 1882, and expanded into gasoline, heating oil and kerosene. John Cook joined the family business in 1983, and Ian, his son, joined in 2002. C.E. Kiff’s employees include three service technicians who also install boilers and hot air furnaces. “Last year we bought two other businesses,” the elder Cook said – a Goodyear tire dealer, and a septic company.
On the fuel side, the company runs three fuel oil delivery trucks and one tractor with a tank trailer that the company uses to haul its own fuel, from a Sprague terminal in Rensselaer, N.Y.
“We were making commitments to our customers quicker than we could get commitments from our supplier on price,” Ian Cook said. “Sprague has offered us the opportunity to match our commitments” at both ends with respect to price, and to exercise greater control over volume and timing of delivery, Cook said.