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Fuel Price Volatility

Fuel Market Trends 2014

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David ZahnWith more than 20 billion gallons of fuel under management from leading global oil companies, international retailers, shippers and government entities, FuelQuest has a unique perspective on challenges and opportunities for the coming year. Our top Fuel Market Trends for 2014 outline what we expect to happen over the next 12 months. Here are some of our predictions:
 
Fuel Prices Will Drop
In 2013, refinery disruptions, geopolitical upheavals, and a surge in the Renewable Identification Number (RIN) market came together to create a perfect storm of events. By summer, these factors culminated in significant spikes in fuel prices. However, this fall saw gas prices plummet to their lowest levels in three years. Nationally, the average price for gasoline bottomed out at about $3.17 in the first half of November. While they have since risen slightly, prices could drop again in December to $3.10 a gallon. We expect prices to continue their current downward spiral into next year. Rising production, lower Renewal Fuel Standard (RFS) mandates, slow economic growth both here and abroad, and easing tensions in the Middle East will help keep prices in check in 2014.
 
Mergers & Acquisitions Will Continue to Accelerate
In 2012, there was a frenzy of Merger & Acquisition activity within the convenience store industry. Master Limited Partnerships (MLPs) were led by such deals as Energy Transfer Partners’ acquisition of Sunoco’s retail assets, and larger chains grew even bigger through consolidation evidenced by the many large and small purchases made by 7-Eleven and Alimentation Couche-Tard. Deal flows have slowed this year relative to 2012, but demand remains strong. Increased deal activity is fully expected through the rest of this year and on into 2014. A mature motor fuels market, higher operating costs and capital spending requirements, a need for liquidity, and companies committed to the industry and looking to grow are all factors that will continue to drive this climate of growth through acquisition.
 
Competition from new companies and upscale in-store experiences will force older, existing retailers to upgrade their sites to drive more traffic. Competing at the pump against larger companies and their greater resources will be a concern for smaller retailers. But, technology exists to obtain fuel inventory, supply costs, pricing and even margin details down to the corner store level. This granular visibility lets retail operators – regardless of their size – manage their businesses with timely and accurate data to capitalize on market price swings, driving in-store traffic and beating their competitors with smarter fuel management.
 
Demand for Predictive Analytics for Fuel Management Will Increase
Since 2002, the number of fuel stations has declined by eight percent due to increasingly strict environmental regulations and shrinking gasoline profit margins, causing competition among the remaining c-store community to increase. For those looking to survive, success largely depends on the margins from gasoline (68 percent of a station’s revenue) and convenience merchandise sales (heavily influenced by fuel volume sold). One way for retailers to break above the noise is to extract value from the huge amounts of transactional information available to them. Automated fuel management solutions offer the insights needed to prepare for unexpected events, plan for surges in demand and take advantage of fuel market fluctuations. In 2014, retailers will see an increased acceptance of predictive analytics solutions as a way to optimize sales, sites, the delivery of fuel, and price.
 
Complexity in Fuel Tax Laws Will Remain
Similar to last year, states will continue exploring ways to increase tax revenues as the federal fuel tax - pegged at 18.4 cents a gallon since 1993 - no longer raises enough money to pay for federal infrastructure spending. Various states have passed their own laws over the past six months as a way to try and fix the broken system. Others are considering options such as indexing the tax to inflation while taking into account rising fuel efficiency, eliminating the tax entirely and instead linking it to sales tax, or the current hot button issue- using a vehicle miles traveled tax (VMT).
 
Ultimately, there will not be a single solution that will resolve a state’s need to maintain its infrastructure. Each state will choose some combination of excise taxes indexed to inflation, toll roads, possibly higher vehicle registration fees, or even a portion of sales tax allocated to infrastructure maintenance to cover the funding gap. In addition, increased use of natural gas as a transportation fuel is causing many states to reconsider current rules and rates for natural gas vehicles. These tax changes will impact an already beleaguered retail fuel industry. Any sales erosion at the pump caused by increased taxes will impact inside store profits as consumers look for alternative or more efficient modes of travel. One thing is clear: complexity and fluidity in fuel tax laws will remain.
 
Challenge or Opportunity? You Decide.
Though the competitive landscape will continue to change and evolving excise taxes will increase in complexity, one thing remains certain for fuel-based businesses in 2014: companies can view these trends as challenges or opportunities. Many leading companies are taking advantage of fuel management automation technology to accurately assess inventory levels, consumption, sourcing options, and tax and environmental compliance. Additionally, they will need to consider automating their tax determination and filing processes to quickly comply with the evolving tax laws and to future-proof themselves to deal with additional forthcoming changes. By doing so, these fuel-based companies are able to compete more effectively in this ever-changing industry.

Riding the Wave of Fuel Volatility

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Fuel price volatility is now a fact of life for those in the industry. Gone are the days of simply filling your tanks to the brim on a schedule to ensure that you don’t run out of fuel at your location. (That is not to say that you ever really want a tank to run-out, but it does occasionally happen.) I like to think of fuel volatility as waves coming in to shore, some of them small, many of them large, but certainly constant. As a fuel buyer, you are in a boat dealing with these waves, making adjustments, trying to stay on course, and navigate through them. In the days before constant price volatility, navigating your boat was much easier as the waters were considerably calmer, a bit like sailing on a smooth–as–glass lake, versus a choppy ocean bay.

Volatility has changed the fuel procurement process and put everyone’s boat in the bay. Now, if you decide to simply keep your tanks full all of the time, you’re sacrificing cost or margin for this simplicity. To illustrate how much this has changed, a price swing of 3 cents or greater only happened 6% of the time prior to 2004. Since 2004, it happens nearly 50% of the time. That’s quite a convincing statistic. If you think for a moment that basically every other day, the price is moving 3 cents or more, you definitely want to have a handle on that shift in price.

Whether you are a retailer trying to maintain margins, or a fleet based company trying to stay within budget, these cents add up. There are also days when the market moves dramatically, and with enough force to make a big difference to your budget. Think of it as a large wave coming towards your tiny boat. For instance, in June, the price for gasoline moved up over 32 cents in a single day in California. That’s a big wave, and one that although probably won’t sink your boat, can have you throwing pails of water overboard for a couple of days, rather than sailing on. But, if you imagine being hit by another wave while you are below deck trying to throw out water, things can get very bad very fast. For a move not quite as dramatic, but still impressive, gas was down in Chicago over 12 cents on that same day.

So, let’s assume you have a fleet of boats, with one in Chicago and one in LA. On that day in June, if you aren’t paying attention you could easily buy on the wrong side of both and get hit with a ‘wave’ on both sides on the same day. Needless to say, that could be a wet, soggy, and miserable day.

Now, as with many things, technology and an experienced team can help to mitigate these movements and put you back in control of your little boat.  It’s kind of like trading your compass for a radio and electronic navigational equipment.  It really makes it easier to sail your boat knowing that you are prepared for the next wave of volatility that may come your way. You know that there is little chance that the wave will catch you napping at the wheel or send you below deck to throw pails of water from your sinking boat.

Fuel Market Trends 2013

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David ZahnWith more than 19 billion gallons of fuel under management from leading global oil companies, international retailers, shippers and government entities, we have a unique perspective on challenges and opportunities for the coming year. We released our top Fuel Market Trends for 2013, which outline what we expect to happen over the next 12 months. Here are some highlights from that report:

 

Fuel Prices Will Continue to Swing Wildly

Our analysis of the U.S. Department of Energy’s (DoE) historical price information revealed a “new normal” in fuel price volatility. Prior to 2004 fuel buyers had little to worry about in terms of day-to-day price changes – changes of over 5 cents occurred only 1.5 percent of the time. Now moves of 5 cents or more happen 25 percent of the time. Worse, price swings of 3 cents or more happen nearly 50 percent of the time versus just 6 percent pre-2004. Businesses that still operate with manual processes and spreadsheets are effectively rolling the dice every day hoping to be on the low end of the price swing. This volatility will continue into 2013 and beyond as a result of the continued increasing cost of fuel, rising global demand, continued political instability in the Middle East, reduced supply, and the impact of speculators and investors on fuel markets.

Superstorms Will Continue to Best the Retailers Superstorm

Sandy’s impact to the Northeast exposed not just the industry’s lack of contingency plans, but also its inability to quickly meet shifting demand patterns around such events. As the total number of tropical storms reaches 80 to 90 each year, businesses will need to establish protocols to assist recovery efforts before the next storm hits Retailers and distributors across the globe would be wise to learn a lesson of Sandy and pre-plan for fuel shortages, outages or lack of electricity at the pump. Aspects of a recovery plan should include communications, stand-by supply commitments and forecasting, as well as calculating the fuel needs of generators and other emergency backup systems that will be critical for operations if there is a power outage. With so much to tackle, retailers will likely not be able to do everything that’s needed in time for the next wave of storms, but they should begin to work towards these goals now.

Mergers & Acquisitions Accelerate and Put Pressure on Small Fuel Retailers

The retail landscape is shifting as M&A activity continues to shake up the fuel industry. The acquisition of regional chains will give larger retail chains a benchmark to enter new markets. Midwest chain Speedway is evaluating options on expanding into western Pennsylvania in the coming year, to compete with locally-based GetGo and Sheetz. Established Florida retailers 7-Eleven and Circle K have new competitors with the entry of two iconic U.S. regional brands, Thorntons (based in Louisville, Ky.), and Wawa (headquartered in Wawa, Pa.). The new canopies on the landscape and upscale in-store experiences will force older, existing retailers in these areas to upgrade their sites to drive in-store traffic. Competing at the pump against larger companies and their greater resources will be a concern for smaller chains in these and other areas of the country. Technology exists to obtain fuel inventory, supply costs, pricing and even margin details down to the corner store level. This granular visibility lets retail operators – regardless of their size – manage their businesses with timely and accurate data to capitalize on market price swings, driving in-store traffic and beating their competitors with smarter fuel management.

Fuel-Based Businesses Will Get Stung By Tax Compliance

With the economy churning towards a slow recovery, many states are exploring every possible way to increase tax revenues. The impacts to fuel-based businesses are many. Organizations will have to be wary of more frequent audit and increased penalties for non-compliance. Savvy companies should be thinking ahead on how to maintain compliance with changing fuel tax rates and rules. Companies dealing with bulk fuel will need to act swiftly to comply with these evolving requirements, as well as future-proof themselves to deal with additional changes in the future.

California Will Become Epicenter for Fuel Debates

California is the largest consumer of fuel in the U.S., however due to gasoline formula requirements related to air quality standards, the state can only consume fuel that is refined within its borders. This makes the state especially vulnerable to global events that affect supply since California receives nearly 50 percent of its oil from foreign imports. Without oil pipelines from nearby states, California is literally separated by time and distance to supplies from outside the state. Maintaining steady pricing is a balancing act with these unique supply factors. There is no relief in sight to fix California’s underlying structural issues, which are subject to constant debate. But perhaps this imbalance will be the impetus for the state to relax its regulations and open up additional supply options. Changes will allow retailers and distributors, at the very least, to have additional options in the event the constant balancing act fails to keep prices in check.

Challenge or Opportunity? You Decide.

Though fuel volatility is expected continue to increase and the competitive landscape will no doubt change, one thing remains certain for fuel-based businesses in 2013 – companies can view these trends as challenges or opportunities. Many leading companies are taking advantage of fuel management automation technology to accurately assess inventory levels, consumption, sourcing options, and tax and environmental compliance. By doing so, these fuel-based companies are able to compete more effectively in this changing industry.

The New Normal

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“Are high gas prices the ‘New Normal’? This was the question posed to the two US presidential candidates during last night’s debate. Just like office water cooler talk and Facebook chatter, the two candidates quickly escalated their differing views on this touchy subject. And no wonder, energy and fuel costs are a growing portion of Americans’ personal budgets, and people feel strongly about this issue as it directly impacts their wallets.

But no matter who is to blame, the facts remain that US fuel prices have risen in the last few years. FuelQuest recently completed an analysis of Department of Energy data, and determined that in addition to prices rising steadily, there is indeed a ‘new normal’ in daily volatility (that is the price movements within each day) for refined petroleum product commodities. Before 2004 a day-to-day move of more than 3 cents in the price of fuel was uncommon – happening around 6% of the time. But after 2004, this volatility is now happening nearly 50% of the time –impacting not only consumers at the pump but various fuel-centered businesses such as trucking companies, fuel retailers and even government fleets.

While the candidates agreed to disagree on how they would attempt to solve this issue, the crystal ball’s vision of the future remains cloudy. Nothing on the horizon seems to indicate this volatility will correct itself to pre-2004 levels – and it will remain a hot topic at the next debate and presidential election.

What are your thoughts on the gas price debate? How do you feel about the ‘New Normal’?

For more information on how to better manage your fuel or to request a white paper on this topic, please send your comments to us at http://www.fuelquest.com/contact-us. Follow our discussion on this topic on FuelQuest’s LinkedIn Group page at http://linkd.in/T0T5Ue.

Storm Forming in Gulf – Be Prepared

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The corner station was busier than usual Monday evening in Houston, and no wonder. All along the commute home, the Texas Department of Transportation (TxDOT) signs ominously stated “Storm Forming in Gulf – Be Prepared”, instead of the usual drive-time information. The story of still-Tropical Storm Isaac’s move to the central Gulf was all over the news and like me, many of the customers at the station were preparing now for the possibility of disruptions to their normal routine later in the week.

This storm has already affected oil production in the Gulf of Mexico with 78% of oil production already shut down, and 58% and 54% of rigs and platforms, respectively evacuated. Those figures are impressive but more so when you consider the Gulf accounts for 23% of total U.S. crude oil production. And with a busier than normal hurricane season already proven, Issac is potentially one of many more storms to enter the Gulf.
 
Customers and colleagues in the fuel and energy industry are certainly keeping an eye on the storm as the busy 2012 hurricane season ramps up. So we offer a short list of measures that fuel distributors and retailers can take in preparation for Issac’s potential supply disruptions:
  • Follow a “keep full” strategy for your fuel tanks.
  • Maintain communication with carriers and suppliers.
  • Secure secondary and tertiary fuel supply options.
  • Consider generators as backup power in case of an electrical outage.
I have spent my life living near the Gulf Coast and seen the wide range of results from these types of storms. I suspect other consumers and businesses alike are taking precautions for what may – or may not – lie ahead in the next few days.
 

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