4 Ways Companies Can Get the Best Value When They Buy Petroleum Wholesale

buy petroleum wholesale

Gasoline is the most widely used transportation fuel in the United States. In 2019, about 142 billion gallons of motor gasoline (approximately 390 million gallons per day) and 197 million gallons of aviation gasoline were used. This means fleet operators, distributors, and suppliers need a constant supply of the commodity, which is only possible by buying fuels in bulk. However, in the wake of the recent Covid-19 pandemic, fuel companies have incurred losses as gasoline prices have spiraled downward to an all-time low. The trend is likely to change as the pandemic abates. However, the slow economic recovery calls for fuel companies to adopt measures to protect them from such unprecedented price fluctuations. Here are strategies fuel companies can use to hedge against losses when they buy petroleum wholesale.

1. Sign a Fixed Contract

When buying wholesale fuels, you have the option of buying through a contract or on the spot. The latter means purchasing fuel from a supplier as the need arises without scheduled delivery and purchase parameters. As such, the company is exposed to the whims of price fluctuations. Conversely, you can’t wait until your oil tank runs dry to purchase fuel. You might end up making emergency purchases, which are often costly.

Signing a contract saves you all such inconveniences because you can lock in a fixed price and protect yourself from future price fluctuations. Another advantage of signing a contract is that it eliminates the uncertainties of the fuel market. You’re confident about having a supply of bulk fuels anytime.

2. Use the Spot Prices as a Basis for a Rack Transaction

If you buy petroleum wholesale from wholesale racks, keep an eye on the market’s spot price; it might save you tons of cash. This strategy is also known as an index deal, and it benefits fleet operators, retailers, or distributors whose purchase volumes have increased over the years and plan to expand. If the company has been buying from a large jobber distributor regularly, it can negotiate to purchase fuel on a spot basis instead of the posted rack price.

Unlike rack prices, spot prices are negotiated and fluctuate based on the volumes involved. If the refiner needs to replace lost production or overproduces wholesale fuel and wants to sell, they’ll do it at the spot price. The success of this strategy depends on a few factors:

  • Your insight into fuel market prices. Let your supplier know that you understand how index deals operate
  • Keep an eye on the daily fuel prices to identify the right time to enter an index deal, especially if there’s a significant plunge in oil prices
  • Analyze the relationship between the spot market and the local rack market. The differences change rapidly, so you want to keep updating that history every six months

3. Purchase a Call Option

This strategy is particularly useful for airlines as they are also affected by oil price fluctuations. They also buy petroleum wholesale and can reduce losses by purchasing the commodity at a specific price within a stipulated date range. The option gives the company the right to purchase oil at a specific price (agreed on today) in the future.

For example, if the current price of gasoline per barrel is $90 but the company speculates it might increase, it can purchase a call option for $6, giving it the right to purchase the oil for $100 within 120 days. If the price per barrel increases to $110 within that period, the company won’t incur losses.

4. Inquire About the Supplier’s Price Benchmark

Industry benchmarks like the Oil Price Information Service are the basis for most oil contracts. Basing contracts on such benchmarks also enhances price transparency and sensitivity to market trends. This way, you can determine if you are buying wholesale petroleum at fair market prices. Other industry benchmarks include NYMEX, PLATT, and EPEX SPOT.

You want to buy petroleum wholesale to get more bang for the buck. These four strategies should help negotiate better prices and enjoy the benefits of buying fuel in bulk. Be sure to keep tabs on the global and domestic fuel markets to identify the best time to strike such a deal.