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Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business or drop us an email at info@propanecost.com.
Trader's Corner
This week’s Trader’s Corner focuses on hedging strategies.
On Aug. 8-9, we will conduct our hedging classes in Houston. We enjoy putting on the classes, and we like to remind propane retailers there is nearly always a strategy or hedge regardless of the market.
THERE IS A HEDGE FOR THAT …
Leftover prebuy
If you have had a warm winter and you have leftover physical prebuy, there’s a hedge for that. Prebuys that you were unable to pull because of warm winters can be damaging to your profit picture. In this situation, prices are most likely dropping and you are left with a high-price buy that you are pulling well into the summer. There are a couple of market strategies that protect you from falling prices.
Tank car deliveries
During many winters, you have to supplement supply with tank car deliveries. Often by the time the railcar arrives, prices have dropped to where the tank car cost is well above the market prices. There is a hedge that protects you from losses on tank car orders.
Physically storing gas for winter
Many parts of the country have to store gas for the upcoming winter. We can show you strategies that guarantee profits on that stored gas and protect that physically stored gas from falling prices.
Consumer cap programs
In situations where we offer consumer cap programs, there are strategies/hedges that make these programs easy to implement. They protect our customers’ supply from rising prices and provide the flexibility to go lower in markets where prices are falling.
Budget programs
One of our favorite experiences was with a client that swore off budget programs. He was frustrated with the process of raising prices to consumers and the complaints he had to field when protecting his margins. The hedge to guarantee and improve profits is easy to manage and implement.
Industrial users made happy
We will never forget that first hedging seminar when a large industrial user pulled us aside during a break. He told us the concept we taught in that recent session provided him a way to come in at or under budget for his energy costs. That session would reap valuable benefits for years to come.
Collars, out of the money options, and crude trades
Some other topics we will cover include how costless collars are not riskless; also, what you need to know about out of the money options and when you may want to consider using crude as a hedge instead of propane.
These are just some of the hedges we cover in the seminar, but we take additional time to further explain the markets and how you need to evaluate the current pricing environment.
This past week, we had some clients close hedges that were not “true hedges” to capture gains the market has provided. That is an ongoing process here because we have seen too many good positions go bad because they were held too long. One of our goals for these types of transactions is for clients to say, “I could have made a little more money.” That is reminiscent of the wealthy investor who retired and someone asked what his key to success was. His response: “Well, I always got out of the market a little too early.” Recognizing gains and when to capture them is always a part of this process.
Group interaction
One of the unplanned benefits of these seminars is the group interaction. Rarely have we seen fierce competitors in the same session. That opens the door for dialogue of best practices between attendees. The favorite group session is the Fantasy Propane Hedging Companies, where the attendees talk about the markets and what hedging strategy to use. The groups are provided day-by-day price changes over the course of a recent year and decide when to get into the market and what strategy is best for the current environment.
We hope you can find time to join us in August. If you mention this article, we will extend the early bird discount to you. Visit www.propanecost.com.
Hedge well and prosper.
Call Cost Management Solutions today at 888-441-3338 for more information about how Client Services can enhance your business, or drop us an email at info@propanecost.com.
WEEK IN REVIEW
A strong upward move in gasoline prices, along with another big draw on crude inventory, kept crude moving higher.
Propane prices outgained crude, showing mid-summer strength.
We start this week neutral. Though the rallies in crude and propane have been strong, we worry about both being overbought at this point.
LAST WEEK'S DAILY HIGHLIGHTS
Monday: Crude and propane prices finished with little change as the market digested the effect of the Egypt turmoil and improving conditions in Libya.
Tuesday: West Texas Intermediate set a new closing high for the year at $103.53 as issues in Egypt became a little tenser. Good quarterly earnings by U.S. companies provided support as well.
Wednesday: It was a bullish Energy Information Administration report for crude with a 9.9-million-barrel draw on inventory. Combined with the previous week, crude dropped more than 20 million barrels. Crude prices closed nearly $3 higher and propane was pulled along for the ride. Crude set another closing high for the year at $106.52.
Thursday: Crude and propane prices declined on profit taking amid reports that worldwide crude production would exceed demand and the market’s response to the Egyptian crisis may have been overdone.
Friday: Good earnings and the best producer price index reading since last September gave support to the market. Federal Reserve Chairman Ben Bernanke’s comments that monetary policy would stay supportive to the job market kept prices higher. |
