Energy Contacting 101
What is a fuel contract?
A fuel contract is a type of futures contract that helps one avoid the risk of fluctuating fuel prices. When you contract fuel with MKC, you agree to buy a specified amount from us that must be delivered by a specific date.
When is the right time to contract?
There is no right or wrong time to contract. It should be a decision that is made considering the profitability of your operation. If you can take the guesswork out of profitability by locking in expenses at a known rate – do it. Historically, pricing is at seasonal lows between December and March, but history doesn't always repeat itself, as we have all seen since the beginning of 2020! History is out the door!
Benefits of fuel contracting
- Accurately forecast your fuel budget
- Level the pricing playing field
- Avoid unforeseen fuel costs
- Smooth out your cash flow
- Take away the daily anxiety of the market's endless price swings
- Enjoy a dependable supply of fuel
- Protect your profit margins
Fuel Contract Pricing information
Contract prices can sometimes be higher than the current rack price (not always) because "futures" are being bought. With "futures" purchases, there is always a risk. Some other factors that move future prices and will generate conversations include:
- Projected supply issues
- Relative dollar strength
- Will there be a cause for higher or lower demand in the future?
- What will OPEC (Organization of the Petroleum Exporting Countries) do?
- Refining cost projections
- Regulatory Changes
How do I know if I'm getting a good price? What is a good price?
You really need to ask yourself, does this price work with my annual budget? In other words, can I spend this much for fuel and still make the necessary profit for my business?
Is contracting your fuel important?
The answer is = YES; it is crucial but not the best option for everyone.
Only you can make that decision if contracting is right for you.
One statement to think about: DON'T LOOK BACK! What I mean by this is if you lock in your fuel at a price you are comfortable with, don't second guess yourself. There is no reason to waste precious time or stress about a cheaper price. There will often be a lower price, but there's likely a higher price, too. None of us have a crystal ball - For your own peace of mind, if you lock it in, forget about it. DON'T LOOK BACK!
What are the Downsides of contracting fuel?
There are none if you stick to your budget. A fixed-forward contract doesn't mean you'll pay the lowest price per gallon daily. Instead, you'll benefit from a steady, even price, undisturbed by the market roller coaster.
Article written by Brent Pelzel, MKC Energy Consultant