We are often asked by clients whether it is a “good idea” to hedge fuel purchases, and can one reduce costs as a result? Unfortunately, the simple answer is “it depends”, and the more complex answer is “it depends on luck”.

Traditionally, transport operators, particularly big road fleets, airlines, and large shipping fleets have hedged their fuel purchasing in order to safeguard against unexpected sudden rises in fuel prices. However, we increasingly find that users of industrial fuel-oils such as Gasoil or Kerosene are considering whether a hedging strategy would be beneficial, particularly as volumes increase in the autumn/winter period.

If a client is looking for absolute certainty in fuel costs for budgeting purposes for instance, a hedge can provide a very effective way to do this. It is likely to be marginally more cost-effective versus a fixed price offer for fuels, and normally does not require a commitment to buy minimum quantities of fuel – whereas fixed price deals normally do (adding a cost risk factor if volumes fall short of forecasts).

The big cost risk

However, in addition to the direct cost of the hedge, some hedging agreements require the client to pay the difference between the hedged price and actual price to the hedge provider, if the price of fuel falls below that price. There have recently been some quite spectacular cost penalties incurred by airlines in particular as kerosene prices tumbled. Hedges with less onerous conditions are available, but the premium payment for the hedge will be higher.

Is hedging complicated?

For most companies, a hedge is a very simple financial instrument available from not only specialist providers, but also banks and insurance companies. The key thing to remember about most of these hedge plans is that the price the client actually pays for their fuel is irrelevant. Because client-specific hedges would generally be prohibitively expensive to write and administer, most plans are based on fuel costs at wholesale markets (e.g. Rotterdam or Marseille). These markets price fuel in dollars per tonne, so it is important to realise that most hedges are against that measure and can exclude currency movements in sterling versus the dollar, and any increase in duty.

Hedging plans generally therefore do not relieve users of following good procurement practice in buying their fuel. Fuel suppliers are constantly seeking opportunities to increase margin, whether at the pumps or in bulk deliveries.

Feel free to contact us for more information.