Hedging on Fuel Prices Can Cut Both Ways
Although fuel prices are the lowest they have been in two years, some analysts are recommending that truck fleets hold off on making high-volume purchases because they believe prices will continue to fall throughout the winter.
The practice of buying fuel contracts on the futures market — known as hedging — can protect the purchaser against large price hikes by locking in a low price for a specified period of time. Contracts can range from several months to several years, and essentially can at least temporarily take the sting out of rapidly rising prices.Essentially, companies buy a specified volume of fuel in futures contracts on the exchange for coming months. If the market price moves above the contract price, the company earns a profit that it can then apply to its physical fuel contracts with a supplier, thus offsetting its fuel costs.This story appears in the Dec. 10 print edition of Transport Topics. Subscribe today.
The practice of buying fuel contracts on the futures market — known as hedging — can protect the purchaser against large price hikes by locking in a low price for a specified period of time. Contracts can range from several months to several years, and essentially can at least temporarily take the sting out of rapidly rising prices.Essentially, companies buy a specified volume of fuel in futures contracts on the exchange for coming months. If the market price moves above the contract price, the company earns a profit that it can then apply to its physical fuel contracts with a supplier, thus offsetting its fuel costs.This story appears in the Dec. 10 print edition of Transport Topics. Subscribe today.
