By Adam Wright:
The volatility that hurricanes Harvey and Irma brought earlier this Fall have stayed around as we head into Winter. The hurricanes initially caused fuel prices to surge, and after the initial price surge wore off in September and early October gasoline prices looked like they may continue to drift lower which lines up with seasonal weakness during this time frame.
However, refinery outages in Houston/Gulf area continue to affect the physical markets and regional supplies in the Great Lakes region became tight. Energy markets started to take into account the tighter supplied markets causing gasoline prices to increase for 5 straight weeks into the beginning of November.
Significant demand for fuel and tight gasoline supplies is not something often seen for this time of year. Demand for petroleum products in the U.S. have been strong and product exports are near record highs for this time of year. As imports into the U.S. East Coast drop, total U.S. gasoline and distillate inventories are falling despite a record year of refinery runs so far in 2017.
As of November 15 gasoline futures are almost 30-cents higher than they were back in August, and prices have backed off their early November highs. This surge in fuel prices has put strain on c-store gasoline profit margins at the pump. Average rack-to-retail c-store profits on gasoline gallons sold are the lowest in 10 weeks and diesel fuel profit margins reached the lowest in 3 months in the beginning of November. Pump margins are as tight in some places as they were when bulk prices spiked during the hurricane induced supply interruptions.
Since the first of October retail gasoline profit margins have been cut in half. During the week of November 3 nationwide gross gasoline margins (blue line on first chart) dropped to 15.8 cents/gal. As you can see on the far right side of the chart, retail gasoline margins hovered around 34-cents on average during the month of September. The month of September helped many c-stores recover some lost margin for earlier in the year.
However, those higher profit margins in September could not hold as gasoline RBOB futures (red line) continued to move higher reaching prices not seen in over two years. On a national average retail gasoline margins have swung over 20-cents twice over the last two months alone. This is due to the hurricanes margins being down to 12.4-cents at the beginning of Sept, and then surged higher to 34-cents where it stayed for four weeks. Once the futures market started to acknowledge the tighter supplies, margins tumbled almost 20-cents.
These numbers are slightly delayed and give you a macro view of how an average c-store’s fuel margin has moved this year. In just four weeks RBOB futures pushed more than 25-cents higher. These kinds of price swings and volatility can either make or break a c-stores month. Typically c-stores see better profit margins on their fuel sales when gasoline futures move lower or move sideways. Profit margins typically worsen when fuel prices move higher. The first chart illustrates this inverse relationship between c-store retail margins and RBOB gasoline futures.
To help protect themselves from these major swings in prices and profit margins, many c-stores implement a variety of hedging programs to help potentially improve profit margins on fuel sales. Traditional hedging strategies are still very popular and should remain in everyone’s hedging portfolio, however c-stores should also look at other alternative hedging solutions such as Automated Hedge Trading programs. An automated hedge trading strategy has the advantage of following a regimented and disciplined rule set that requires a more objective and reliable approach to trading. The computer can make all the buying and selling decisions for you.
Below is the hypothetical performance history of an automated hedge trading program that Powerline Group is offering for RBOB Gasoline futures. This particular hedge program is designed to hedge with the intraday changes in the market, does not hold any overnight risk because it only trades during the day, and it has a live track record over the past two months. During the first two months of trade it has a Live P/L of $1,714, which is about 4.6 cents/gallon. The worst drawdown since the program started trading has been 3.7-cents, meaning at one point the trading program accumulated 3.7-cents in losses at some point. The months in yellow are tracked months, green months are live traded and the rest in white are hypothetical back-tested results. Based on hypothetical results the average monthly return for the past year has been approximately 3-cents/gal. All of the numbers in the image are based off of trading 1 contract equal to 42,000 gallons. Click on the picture to view more detail about the automated hedge program.
Powerline works with c-store operators and other petroleum marketers to develop approaches to enhance margins, manage inventory, ensure procurement budgets, and limit exposure to upside price risk in today’s extremely volatile marketplace. You can view the rest of our automated hedge programs at www.powerlinegroup.net.
Powerline will be adding more hedging trading programs over the next couple of months and will eventually have a portfolio builder that will give us extra tools to allow us to continue being a more efficient hedger.
Adam Wright is the Director of Client Services at Powerline Group. He has been working in the petroleum risk management/hedge business and has been a licensed commodity broker since 2013. Powerline’s mission is to help petroleum clients navigate the ups and downs of an ever changing fuel market landscape. Adam contributes to the firm’s proprietary research platform, as well as working with clients to create customized hedging solutions. Powerline works with C-Store Operators to help protect their retail fuel margins because we know every cent counts. We also help Petroleum jobbers and wholesalers to develop special contracting programs to offer their customer base, or we can work directly with end-users of diesel fuel such as transportation or construction companies to help protect their fuel budget. To learn more about how you could utilize this hedge structure or similar hedge structures to potentially help protect yourself against inverse price moves in the fuel markets please contact Powerline Group at 217-351-9030 or visit our website at www.powerlinegroup.net.
This material has been prepared by a sales or trading employee or agent of Powerline Petroleum, LLC and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not rely solely on this communication in making trading decisions.
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The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Powerline Petroleum, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
