By Darren Dohme, Powerline
August just began, and that means the summer driving season will soon be coming to an end. Gasoline demand typically starts to decline during August and eventually falls further after the Labor Day holiday weekend. While demand does typically start to taper as summer wraps up, August is still a huge vacation road trip month. Families will be taking one last trip before the kids go back to school, and with gasoline prices still relatively low, it is expected that gasoline demand should be steady this month.
While gasoline prices have been slightly above last year’s levels, gasoline demand was still able to hit record levels this summer. The summer started off with a bang on Memorial Day weekend when gasoline demand hit a new record of 9.822 million barrels per day (MMbpd). Improving labor market and consumer confidence has also helped gasoline demand stay strong throughout the whole summer. For the most part, gasoline demand has hover around 9.6 – 9.8 MMbpd, and at the end of July it was 1.2% higher than last year. Many analyst believe that retail gasoline prices will reach their summer high this month before they head lower into the fall and winter seasons.
While it is very typical to see demand surge during the summer months, it is not typical for gas prices to hit their price lows in June. Heading into the summer, the gasoline market faced high rates of production at the refineries and high inventory levels keeping a lid on prices. That resulted in this year’s low—so far—for RBOB gasoline futures of $1.3955 on June 21.
Low fuel prices this summer not only benefitted consumers, but low prices also helped convenience store operators that are selling the fuel to the consumers. The lower prices during the month of June allowed c-store operators to improve their profit margins on their retail fuel sales. On average, a c-store will make between 12 – 15 cents per gallon of gasoline sold. During the month of June, c-stores were able to enjoy profit margins of almost 30 cents per gallon on their retail gasoline sales, and were able to keep the margins above 20 cents for five straight weeks. These numbers are based off of national averages and can vary widely depending on location.
Unfortunately, all good things have to come to an end, and since bottoming out in June, gasoline prices have increased by more than 25 cents in the last month. Gasoline demand has not been affected by the price jump, but the c-store operators have certainly taken a hit. Retail gasoline margins had dropped more than 10 cents in two weeks, and in some locations, margins were in the single digits. That 10-cent decrease equals about a 35% decrease in profit margins in just two weeks.
The increase in fuel prices over the past month has really crimped c-stores’ retail fuel margins. This happens because when wholesale fuel prices start to increase, c-store operators are not able to raise their street prices quickly enough to make up for the price difference, and vice versa for when fuel prices fall—c-stores typically see better profit margins on fuel. Gasoline is one of the most cost-sensitive commodities out there, it is about the only product that a consumer will go out of their way just to save a few cents per gallon. This has created a very competitive environment for operators trying to price gasoline at the pump.
Naturally, wholesalers have to increase their fuel prices during this time frame, but retailers know that they can’t pass along the full price increase to the consumer because they don’t know if the competition is incurring the same increase in costs. Wholesale prices can get rather volatile and can occasionally swing as much as 20 cents higher or lower in a day. This extreme price volatility is seldom seen at the pump because most c-stores cut margins to fight for price-sensitive customers.
Over the last two years, retail gasoline margins have averaged a 20% swing from one week to the next and can swing as much as 50% month to month. To protect themselves against these adverse price movements, marketers and c-store operators are starting to use automated hedge trading programs.
We’ve seen more marketers and c-store operators adding automated hedge trading programs to their risk management portfolios this year. These automated programs are designed to potentially trade in the direction of the futures market. They use pre-programmed internal parameters based off of various market indicators to either buy or sell the gasoline and/or diesel fuel futures. These hedging strategies have the ability to help offset lost street margins when prices rise and can also have the ability to protect you against lost inventory value when the market is declining.
Some automated gasoline and diesel fuel hedge trading strategies can even hedge against the daily price moves. An automated day trading hedge strategy can help lower overall hedge trading risk by carrying no overnight positions, hence less margin money is needed. Plus, once an automated hedge strategy executes a position, the trading program can instantly and automatically enter protective stop orders, breakeven stops and profit targets. If none of those are hit during the trading session, then the computer will automatically exit the hedge position before the market closes.
Automated hedge trading programs can make it easier for a petroleum marketer or retailer to participate in a hedging program since the computer is making all the buying and selling decisions for you. An automated program works while you are busy doing other things, like in a meeting or on vacation, and you no longer need to feel pressured to stay up with the daily news events that could affect the market. Just let the computer do it all for you.
Darren Dohme has been in the petroleum hedging business for 30 years. Darren is a managing partner of Powerline Petroleum and understands that every cent counts. Powerline works with transportation companies and other end users of diesel fuel to help cap their fuel prices, and also works with petroleum jobbers and wholesalers to offer Maximum Price Contract Programs to their customers. If you would like to learn more on how this hedge strategy could work for you, contact Powerline Group today and visit 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.
Distribution in some jurisdictions may be prohibited or restricted by law. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibition or restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction without registration, the market commentary in this communication should not be considered a solicitation.
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.