Price Risk Management for Fuel Buyers
Price risk management is the practice of fixing, capping or limiting what a buyer will pay for fuel over a future period, so that a budget set in October survives a cold January. It is done with contract structures, financial instruments, or both, and it is separate from the question of who physically delivers the fuel.
Four structures cover most fuel programs
- Fixed price supply: an agreed price per gallon for a defined volume and period.
- Capped or collared price: a ceiling you will not pay above and usually a floor you will not benefit below.
- Index plus differential: floating with a published index and fixing only the transport and service portion.
- Financial position alongside physical supply: a financial hedge held against fuel priced on an index.
Physical supply and hedging together
VP Ventures does both. A buyer who hedges with one party and buys fuel from another owns the gap between them. If the hedge settles against Mont Belvieu and the fuel is delivered against a different basis, the two do not cancel out, and the buyer finds out in the month it costs them. Running both through one counterparty removes that mismatch.
Locking a fuel price for a fixed budget
A fixed price supply agreement sets the price for a set volume over a set period regardless of what the market does, and carries no separate fee. A cap costs something and leaves the downside available. Buyers who fix price but not volume have solved half the problem, so both are set in the same arrangement.