The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
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www.fueloilnews.com | FUEL OIL NEWS | MAY 2016 29 Hedging is a time-honored risk man- agement solution that is applied to a broad range of commodities and finan- cial instruments. Its main purpose is to mitigate volatility and protect margin by providing some certainty in what are uncertain markets. In the airline indus- try, the practice offered some carriers, such as Southwest Airlines, significant advan- tages in the highly volatile markets of recent years. Hedging is similarly com- monplace for heating oil marketers, but it is certainly not a universal practice. So, just who should be hedging, and under what circumstances? Fuel Oil News spoke with some hedging experts for their feedback on the subject. "There is never a need to hedge," said Phil Baratz, CTA, who co-founded Angus Energy in 1991 and is the managing member of Angus Partners, LLC, both based in Fort Lauderdale, Fla. "A hedge is always a choice. You are attempting to remain competitive." The point Baratz raised, echoed generally by the others interviewed, is that the hedging decision should work as a component of an overall business model. It should be seen as a margin support tool and one that further allows a dealer to broaden pricing options to his or her customers. "If you look in the airline industry there are some that do and some that don't hedge at all," said Mark Skaparas, owner of Aletheia Consulting Group, Auburn, Mass. "There is no blanket answer that everyone should hedge all the time—I dis- agree with that. What it really comes down to is: What are you trying to accomplish with your company [and] what type of emergency reserve you have to withstand a substantial move in the market against you and what type of programs you offer." SPECULATION: HEDGING OR NOT HEDGING? While hedging in its pure form is a tool to reduce the impact of volatility in the markets, some use it as a tool to specu- late. Some degree of speculation allows the markets to function. However, it can easily be argued that not hedging is just as open to speculation. "You're either hedging or speculat- ing. There is no in between," said Baratz. "I'm not saying it's a bad idea to specu- late—who am I to tell somebody what to do with their business? But the notion that hedging is good or bad is inaccurate. It comes back to the correct mindset of a business. In 25 years of business we've never told someone that they have to hedge. Because, if you don't hedge and you've chosen to speculate that's fine. You just have to understand it. You can choose to make a promise to your cus- tomer and you think prices are going to go down. You can choose to buy refurbished equipment instead of new equipment, but something might happen. You can choose to not buy a new truck as the old truck is starting to wear down. You can choose not to ensure your current truck for theft. You can choose a lot of things and I'm not saying they are good or bad." Baratz expanded on his point by describing the stance a business owner might take toward insurance: "When was the last time an oil truck was stolen? It does happen, but I'm going to save $500 per TO HEDGE NOT TO HEDGE or CAN HEDGING WORK FOR EVERYONE, AND SHOULD IT? BY KEITH REID