2024 Hedging Survey

Watch the Market, but Stick to Your Strategy

The annual Hedging Survey is a chance to look at the past season’s pricing and challenges, and get expert insight on how to plan for next winter. The strategies put in place over the spring and summer are energy retailers’ protection against price and supply volatility.

The 2023-2024 heating season may have been the most “normal” in a long time, at least in terms of pricing and supply. Sure, it was a warm winter, the market was still backwardated, fuel supplies were still at near-record lows, and OPEC+ and Russia cut back on crude production, but there were no price spikes anywhere close to what the industry faced in November 2022. The October 7, 2023, attack by Hamas on Israel, the war that ensued, and the Houthi attacks on ships in the Red Sea, including fuel transport, had surprisingly little effect on fuel prices. At least for now.

The war in the Middle East doesn’t look like it will be ending any time soon, and one can only hope it doesn’t spread. Ukraine continues to defend itself against Russia. OPEC+ production cuts could also continue into next season. And, as you might have heard, there’s an election coming up.

Oil & Energy again reached out to hedging providers who support the heating fuels market about their thoughts on the current market place and expectations for the 2024-2025 season. We would like to thank the companies and their representatives who took the time to participate: Aletheia Consulting Group, Angus Energy, and Hedge Solutions.

Oil & Energy Magazine: What was your biggest surprise of the past year, and what did you get “right?”

Aletheia Consulting Group: The Silicon Valley Bank collapse looked like it was going to lead to a recession but months later equities would post 16 weekly gains out of 18 for the first time since 1971. Yet crude stayed range bound from the end of 2023 through early March 2024. The biggest surprise is that commodities did not follow the strength of equities.

Hedge Solutions: Overall, this seemed like a pretty uneventful year. No basis blowouts. The obvious surprise event was the tragedy of October 7. The Middle East turmoil that followed did surprise with the lack of a stronger response from oil prices. It reveals a lot in terms of a weak undertone to fundamentals. We take a very conservative posture to hedging. So, I would say we typically don’t have any surprises or “screw ups” if you will.

Angus Energy: From a hedging perspective, the past year just reconfirmed that pricing, basis and weather are as unpredictable as ever. It is not a matter of getting things “right,” but a matter of deciding to either speculate with your profits or properly protecting them.

Oil & Energy Magazine: There are always geopolitical issues to deal with, but this past season had the Hamas invasion of Israel and resulting war; the Houthis shutting down the Gulf of Aden, Red Sea and Arabian Sea; OPEC+ cutting production; etc. At the same time, the U.S. is producing more crude than ever before. How did these issues affect your pre-season and/or mid-season hedging strategies.

Hedge Solutions: As mentioned in the previous question, these issues didn’t really impact the longer-term hedging strategies that covered the seasonal pricing programs because we don’t leave anything to chance there. However, we do a lot of what we call short term hedging when rack to retail margins are healthy. Here we took an aggressive posture on dips in the market. The turmoil in the Middle East created a lot of volatility in the price action so we tried to take advantage of that as much as possible.

Angus Energy: Hedging strategies need to assess risk and (reasonably) transfer that risk to “risk-takers.” Supply interruptions can impact not only the price of crude oil and refined products, but the costs to transport the oil/products and the value of storage. I don’t think that a short-term look at the season (considering the warm weather and lack of true supply disruptions) is the way to analyze a hedging portfolio strategy. Customers want some sort of price certainty, as a distributor you need to match that certainty with available hedging tools, not just react to that morning’s news.

Aletheia Consulting Group: Technical indicators play a vital role for entry points whereas the latest news headlines, which are difficult to validate, take on secondary importance. Hedging strategies are dependent on each individual company’s specific requirements which include supply locations and risk tolerance.

Oil & Energy Magazine: This is a presidential election year, and it seems the parties are further apart on liquid fuels production and use than ever. Do you anticipate the results are going to make a significant impact on fuel prices? If so, how to you plan for
alternate scenarios.

Angus Energy: Politics have always been part of the landscape. The Left wants
to ban fossil fuels and understands that it cannot (and should not) happen over-night. The Right wants to “drill baby drill” but recognizes the are climate issues to be considered. If you cull out social media (perhaps all media), we are not in a position to even consider changes in liquid fuel production in the near future.

Aletheia Consulting Group: Although politics get the emotions running high, the reality is that many factors are involved outside of the presidency. Congress plays a pivotal role in energy policy. That is the way our founding fathers wanted the checks and balances to be in place (executive, legislative and judicial branches). The key is to not get distracted by the latest headlines and just execute on the hedging plan.

Hedge Solutions: Yes, I believe the November elections will have a significant impact on traders’ outlook on oil prices both domestically and globally. It won’t be immediate, but it will have long-term implications. Trying to predict a winner is a bad bet in my view. I certainly wouldn’t hedge based on a prediction in the outcome. Per usual, we’ll keep it conservative and hedge based on what the market gives us and that all-important target margin.

Oil & Energy Magazine: Distillate stocks remain at the bottom edge of the five-year average. Futures prices for heating oil have been relatively steady, especially when compared to the wild volatility of the previous year. How do you see these two variables playing out for dealers looking for the best pricing?

Aletheia Consulting Group: Dealers need to keep the lines of communication open and frequent with their suppliers. If they don’t have the time to talk to their wholesalers or brokers consistently, then there are consultants who can handle this dialogue. Just remember that the wholesale rep represents the wholesaler, the broker represents the brokerage, so you need to feel comfortable with the advice you are receiving on the other end of the phone.

Angus Energy: Prices spiked in the prior year when Russia attacked Ukraine. Since then, the news cycles have focused elsewhere, and the produced oil of the world seems to have found some new homes – i.e., China and India. Inventories are low and the backwardation of pricing (front month, at present, representing a >25-cent per gallon premium to next winter) doesn’t provide any financial incentive to drive up inventory levels. “Best pricing” is either in the moment or in the rearview mirror, but “looking for best pricing” sounds more like speculation than hedging.

Hedge Solutions: The ULSD market is still backwardated. As of the end of February, the spot futures month (using April) is 21 cents per gallon higher than the degree day weighted winter strip of $2.50 per gallon. Additionally, domestic refinery output is running at its lowest utilization rate in two years, at 86 percent. Though expected to recover in the second quarter, we continue to run low stocks in PADD 1. This will make it difficult for inventories to build ahead of winter, again.

Oil & Energy Magazine: The EIA’s Short Term Energy Outlook is forecasting wholesale and retail prices to be relatively flat with a slight drop through 2025. Do you agree?

Hedge Solutions: Not to dodge that always high in demand question, but it’s impossible to forecast this with any kind of reasonable accuracy. There just are too many variables. Economic growth or lack thereof, geopolitics (Middle East is a big one), a presidential election, weather, etc. The one constant that is helping prices remain somewhat steady is domestic crude production. This should hold steady at 12.5 to 13.5 million barrels per day.

Angus Energy: Almost everyone who predicts out into the future uses the forward curve of pricing to make those predictions and then gives a little commentary on why the futures contracts are over or understated. The forecasts generally turn out to be wrong, but at the time of forecasting are logically based on available information.

Aletheia Consulting Group: Forecasts at the end of the day are best guesses or what can also be called speculation. Don’t speculate, instead hedge!

Oil & Energy Magazine: What is your view of the supply outlook for the industry for next heating season?

Angus Energy: Assuming that the weather will be normal and that the swing in prices may well be consistent with what we have seen over the past few years – which is significantly more volatile than in the prior decade.

Aletheia Consulting Group: Having worked for multiple wholesalers, I have the utmost respect for how they keep the terminals wet and adapt to challenging market conditions. Just communicate with your suppliers. Help them help you. Be transparent with as much information that you feel comfortable sharing. They need to forecast sales as much as you do.

Hedge Solutions: As mentioned, we are right on the lower edge of the 5-year average for US distillate stocks. This is the best position we’ve been in since 2022. That helps. I still am concerned about the lack of supply and suppliers in PADD 1. I’ve sounded this alarm over and over again the past 10 years and even louder the past 3 years. If and when we get that solid winter, and it doesn’t have to be a record breaker by any means, I believe we’ll have supply issues. Not just a basis blowout but trouble getting supplies. We don’t have enough storage and we don’t have enough suppliers in the marketplace to avoid this issue.

Oil & Energy Magazine: Will “basis” be an issue this winter?

Aletheia Consulting Group: Basis expansion is always a concern especially when hedging price protection programs. You can prepare for it but at the end of the day you have to balance the risk and reward through different strategies.

Hedge Solutions: It will be if we have a cold winter.

Angus Energy: Basis is always an issue. The tighter the physical market, the wider the potential swings can be. Ignoring basis and just assuming that it will just work out assumes two things: 1) competitors are not hedging their basis, and 2) over the course of the delivery season it will just be “average.” Both assumptions would make me nervous if I were a supplier.

Oil & Energy Magazine: Will higher bio blends impact hedging strategies next winter?

Hedge Solutions: I’m not sure of next winter. In fact, it’s doubtful. But as the blends get higher in future years, say 30 percent and higher, then we have to rethink the hedging strategy. RINS prices, feedstock prices like soy, cooking oil, etc., and the BTC credits will all have a greater influence on the bio fuel price as blending rates go up.

Aletheia Consulting Group: Higher bioblends are certainly a consideration with regard to strategies. The more moving pieces, the more complex the hedging strategy. You need to be on top of your supply chain.

Angus Energy: Not in a meaningful way from what we are seeing, but that can change.

Oil & Energy Magazine: What is the first thing you tell all your new liquid fuel clients about hedging and your processes?

Angus Energy: Start with your risks, not your opinions. Better put, “what has kept you up at night at any time over the past few years, and how can you protect yourself so that you will be able to sleep next year?”

Aletheia Consulting Group: Drain out the noise and just think about the task at hand. Secondly, I remind clients that this industry provides a great service to the community. Everyone, no matter what economic status or political persuasion, needs energy and the energy retailer has for decades delivered on the promise of keeping people warm. Lastly, a properly implemented hedging strategy will give them profitability in any market conditions.

Hedge Solutions: We still preach the D.E.D. rule to them. Develop a plan. Execute that plan. And be Disciplined about Executing the plan! It is tried and true since 1998. We also preach the importance of having a good tracking/accounting system. That’s why we developed Hedge Insite. Lodestar is the latest addition to our toolbox. Lodestar is simply the plan, documented in a format that lays out the plan week to week. It lets us know not only when to execute the hedges, but exactly how we are going to execute.

Oil & Energy Magazine: Is your company offering any new products or services for the 2024-2025 season?

Hedge Solutions: Since you asked, yes, we have introduced a product that hasn’t been named yet. But we are offering a service where we will do the actual short term margin management day to day. We believe, after significant research and monitoring through our MarginTrak software, that we can improve profit margins significantly by running the short-term hedging program using our systematic approach throughout the heating season. Secondly, we have added new features to Hedge Insite, while making significant improvements and a new look to MarginTrak.

Angus Energy: We continue to focus on solving the problems that are plaguing the industry and are impacting the bottom line (recognized or not), including: delivery size, variances, automated k-factor adjustments, fleet management. We continue to improve our tech-enabled services and solutions that make a big difference to our clients.

Aletheia Consulting Group: ACG is wholesale supplier and brokerage neutral (think Switzerland). You can buy wet barrels and trade with whomever you would like. Our job is to coach you through the best offers and strategies available. ACG does not make money on the wet barrels nor option trades. This fee only for service allows our clients to be confident there is no conflict of interest. We act as a true independent advocate for our clients.

Oil & Energy Magazine: Do you have any last comments about the year ahead?

Aletheia Consulting Group: Back in college while attending UMass Amherst I learned about how Toyota utilized the philosophy of “kaizen.” Kaizen is the concept of the continuing improvement of all functions. Are you continuing the improvement of your fuel purchasing and hedging strategies? If not, maybe it is time to seek a fresh opinion or evaluation of your current business practices.

Hedge Solutions: Resist speculating. Hedge what you sell. Plan well in advance. And hit your target margin. Your costs continue to rise every year. Labor costs, insurance costs, and pretty much everything that goes into operational costs has inflated the last 3 years. So, make sure you understand that number and make sure you hit your target margin. This is a sound business strategy.

Angus Energy: Customers just want fair prices and will not be loyal if they are surprised. There is no right or wrong with hedging, it is just yes or no. Volatility has not shown signs that it is going away: price (oil), basis (differential) and weather (demand) all need to be considered when offering a price program if you plan to achieve your margins. If operating costs are going up (they are) and volume per HDD is dropping due to more efficient equipment (it is), and the government is making it harder to add customers (they are), then – unless you are improving the cost side of your operations – your only “lever” is to keep raising prices. That is not a sustainable strategy. Solutions are available for those who understand those inherent risks to the business.

Our thanks, once again, to this year’s Hedging Survey participants for their time and thoughtful responses: Mark Bloom, Chief Marketing Officer, Angus Energy (mbloom@angusenergy.com, 954-564-7500, ext. 113); Richard Larkin, President, Hedge Solutions (rich@hedgesolutions.com, 800-709-2949); and Mark Skaparas, President, Aletheia Consulting Group (mark@aletheiaconsultinggroup.com, 508-245-2518).

Disclaimers:

Aletheia Consulting Group: Aletheia is registered with the National Futures Association as a commodity trading advisory and swap firm.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and be liable for amounts well above your initial investment.

Aletheia Consulting Group LLC does not guarantee or warrant that the contents contained herein are 100% accurate. We have made reasonable effort to present accurate information, pricing, and statistics. Therefore, the information is provided “as is” without warranties of any kind.

In no event shall Aletheia Consulting Group LLC and its related principals, agents or employees be liable for any damages whatsoever, arising out of or in connection with website, information, or other verbal and written communications.

Information contained herein was obtained from sources believed to be reliable or is a reasonable assessment of that information, but is not guaranteed as to its accuracy.

Angus Energy: PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and may be liable for amounts well above your initial investment.

Hedge Solutions: The information provided in this market update is general market commentary provided solely for educational and informational purposes. The information was obtained from sources believed to be reliable, but we do not guarantee its accuracy. No statement within the update should be construed as a recommendation, solicitation or offer to buy or sell any futures or options on futures or to otherwise provide investment advice. Any use of the information provided in this update is at your own risk.

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