We recently published an introduction to fuel management strategies for fleets. In this post we’ll take a closer look at fuel hedging. It’s a common fuel management strategy in some sectors, but is it right for your business?
For more information on how we can help you and your fleet, get in touch with us on 020 8290 9099 or email us at commercial.motor@anthonyjones.com.
What is Fuel Hedging?
Fuel hedging is a financial arrangement in which haulage and logistics firms lock in a guaranteed price for fuel in advance. This then becomes the price they’ll pay for their fuel no matter what happens in the global fuel market.
Because fuel hedging allows firms to secure a fixed price for up to 24 months in advance, they can avoid the uncertainty that comes with market fluctuations. Fuel hedging therefore gives firms a sense of stability in an increasingly volatile world.
How Does Fuel Hedging Work?
Fuel hedging involves firms entering a direct arrangement with a fuel supplier. Firms can then either:
- Agree on a long-term fixed price at an unchanging rate for a specific period, which can be up to 24 months.
- Pay a monthly settlement based on the difference between an agreed fixed price, and the previous month’s average price for fuel. If the monthly average is higher than your agreed fixed price, then the supplier will credit your account with the difference. But if the monthly average is lower than your agreed fixed price, you’ll have to pay the difference.
The Risks and Challenges of Fuel Hedging
Fuel hedging allows businesses to manage their budgets and protect their profit margins, no matter what happens to the fuel market. So, why doesn’t every haulage and logistics firm use fuel hedging?
- Fuel hedging arrangements can be prohibitively complex. You may need the support of a skilled and experienced team of accountants to get a sustainable long-term arrangement that works for you.
- Effective hedging is rarely a “one-and-done” deal, either. To get the best from the arrangement, you may need to keep constant tabs on the market conditions, so you can adjust your strategy as necessary. Not all businesses have the time or the resources for this.
- Fuel hedging can lead to losses as much as it can lead to financial security,. You need to accurately predict the future market conditions, and choose the best hedging strategy accordingly. If you do not, you may find yourself paying a higher price for fuel than the market average.
Which Sectors Use Fuel Hedging?
Fuel hedging is particularly common in the maritime and aviation sectors. Marine and aviation operations are particularly vulnerable to volatility in the fuel market, so fuel hedging can provide some much needed certainty and stability. Plus, businesses in this sector are more likely to have the resources necessary to arrange and maintain an effective fuel hedging strategy.
Also, it’s common for businesses in these sectors to include fuel escalator clauses in their contracts. This allows them to charge higher rates in line with rising fuel costs, which gives further protection from market instability. Fuel escalator clauses may become increasingly common in haulage contracts, but many firms may still be vulnerable to price swings.
Is Fuel Hedging Right For You?
Consider your commercial fleet insurance: Some smaller businesses may choose the lowest possible level of cover as a means of managing costs. But if they ever need to make a claim on their policy, they will likely find that they do not have the cover they need to meet all of their costs. As a result, paying the absolute minimum for insurance is usually a false economy. It saves money, but only to a point.
Fuel hedging can present similar risks. You may lock-in a certain price for your fuel. But fuel prices can fall, as well as rise. And if your fixed price is higher than the average price, you may be obliged to pay the difference for as long as there’s a discrepancy.
Unless you have the time and resources to invest in a long-term strategy, then fuel hedging could end up costing you more money than you save. This is why fuel hedging is a lot more common in some industries than others, and why larger firms are more likely to use it than smaller firms.
Be sure to read our guide to fuel management for fleets, which discusses some strategies that may be more accessible for smaller businesses.
We Can Help Your Fleet Manage Uncertain Times
We understand that times are tough for most businesses these days. We can help your fleet make significant savings without compromising on your long-term stability.
As Steve Blackmore, Director at Anthony Jones explains: “At Anthony Jones, our commercial vehicle experts can advise you on key risk management procedures for your fleet.
“We can then show you how to evidence these procedures to insurers, which can help you make savings on the cost of your cover. Finally, we can help you find tailored cover that meets your needs at a price you can afford.”
For more information about how we can help support your business, call our dedicated team on 0208 290 9099, or email CM@AnthonyJones.com.
