Fuel Oil News

Fuel Oil News May 2016

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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30 MAY 2016 | FUEL OIL NEWS | www.fueloilnews.com truck and on my 20 trucks I'm going to save $10,000 a year, which is good money for me." Baratz said, "How do you argue with that? Except that if it is stolen it'll cost you $100,000 to replace." Rich Larkin, president of Hedge Solutions, Manchester, N.H., discussed how using hedging as a tool for speculating not only misses the boat, but can be disastrous. "An interesting piece of data that came out last year from Cetane's Steve Abbate, is that in talking to his colleagues in the industry the number one reason companies were liq- uidating was poor hedging," he said. "That was a mind-blower to me, but I've seen it. Either they got caught buying too much and the price went down, or not buying enough and the price went up. It's a tool for managing your margin, but it's not a tool, in my view at least, to speculate. I always tell the clients if you think you've got it figured out there are a lot of folks out there that do this for a living every day, and they're lucky if they squeeze 10% out of it." A major event in U.S. history—the California Gold Rush—offers an instruc- tive case. For all of the hysteria generated by the discovery of nuggets in the Sacramento Valley in 1848—the Gold Rush generated the largest mass migration in U.S. his- tory—much of the real money was made in enterprises other than digging and panning. Some prospectors did very well for them- selves, some broke even, but most went bust. The real fortunes were made far more traditionally by the merchants, including, most famously, Levi Strauss. "The brain cells that are wasted relative to what the market's going to do relative to the brain cells that should be used to figure out how to run a business better is my pet peeve," said Baratz. RELATIVE RISKS In general, the risk and margin factors that would drive a hedging decision are based upon the price program strategy a company offers its customers: rack plus, fixed price and price cap. With rack plus, the necessity to hedge is reduced as long as competitive issues are relatively equal. "If you haven't made any promises to your customers, and your customers aren't going anywhere and you're making your full margin you don't really care that prices went up," Baratz said. "But if it went up and you made a promise—if you didn't back up that promise maybe it's coming out of your margin." Hedging is seen as an almost absolute requirement with flat price programs and price cap programs. "If you offer up fixed-price or a price cap you absolutely have to hedge, because I've seen companies go out of business as the market moved against them and they didn't have the ability to back up that offering to their customers," said Skaparas. "In some states, if you offer pre-buy you have to have 75% of that bonded." While heating oil might be calming down somewhat compared to the sudden TO HEDGE NOT TO HEDGE or

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