Propane Supply
Beyond Contracting Season: Managing Supply, Margins & Market Volatility
Contracting season may be over, but propane marketers still have important decisions to make on spot buying, hedging, storage & supply planning
By Arthur Ravo
Although the propane contracting season may officially be behind us, as a retailer, your work is far from finished. Now is the time to stay proactive and adapt your strategies — based on evolving market data — to remain competitive and maximize your margins. If you’ve crafted your contract to align with anticipated sales and have positioned yourself to capitalize on discounted spring and summer spot buying opportunities, you must do the work to keep the momentum moving forward.
Working With Suppliers
Understanding your local market is essential. Are there suppliers who are long and need loads lifted now? Are you situated near a refinery that’s producing substantial volumes of gasoline, diesel and jet fuel — and needs to move the accompanying propane production quickly? Based on their own situations, some suppliers may have lower prices than others. Thus, be sure to include a wide range of suppliers when quoting your spot requirements, including those you may not have term contracts with. This broad approach helps ensure you secure the best possible deal.
Navigating Volatility in Propane Pricing
In this current pricing environment, it’s wise to avoid filling storage tanks while costs remain high, as this gives you flexibility to benefit when prices decline. Even though propane prices haven’t tracked crude oil precisely, they are still elevated compared to most of this past winter. Propane fundamentals are weak, with record-high seasonal inventory, robust production and exports limited by dock space and ship availability. Once the Iranian conflict resolves, it’s likely we will see stronger downward pricing pressure. Taking this approach positions you to capture more favorable pricing as the market shifts.
Margins are the lifeblood of your business, and how you set your retail pricing will determine your margins. Until the market experiences its next downturn, it’s crucial that your retail prices reflect all the higher cost components stemming from the current conflict: hub prices up more than 20 cents, diesel costs up more than 75% and higher common carrier fuel surcharges all impacting your bottom line.
With your customers’ cost of living on the rise, they may reach out to you and ask for pricing relief. Know your costs inside and out so you can address this request properly. If you must offer discounts in this environment, make sure they come attached with additional company benefits such as longer contract terms or quicker payment arrangements.
Evaluating Your Fixed Price Program
’Tis the fixed price program season. Take a fresh look at your fixed program sales and assess where they stand. This winter’s fixed price programs will be more challenging to navigate. Once you begin selling customer fixed pricing, it’s critical to protect your costs. This year, flexibility is more important than ever. Hedge your costs by layering in smaller quantities than in previous years. Locking in large hedge positions only to see the market erode or not being able to raise your fixed sell price if the market continues to climb could severely impact your margins.
Generally, I recommend reevaluating your long and short positions on a weekly basis, then adding more hedged volume as needed and adjusting your sell price.
Hedging With Intentionality
When hedging, carefully consider how many gallons each month to lock in. Last winter was colder than normal in the northeast and mid-Atlantic, so don’t simply use 100% of last year’s volumes as your benchmark. If prices at the hubs remain inflated, and if you experience a warmer winter with fewer delivered gallons, you risk being overhedged and overpriced — another reason your programs need to be flexible.
One bright spot is the opportunity to hedge multiple winters; October 2027 through March 2028 is running at a 10-cent discount compared to the coming winter. Offering a two-year lock-in rate may help mitigate nearer-term higher pricing and be an attractive option for customers looking to keep a lid on this winter’s cost. It also means you lock that customer in for two more years.
Prioritizing Propane Supply Management
With term contracts finalized, spot buying opportunities ready to execute, and your customer fixed programs and hedging strategy in place, what’s next? This past winter reminded us that supply management must be front and center — not something managed from the sidelines. Many marketers experienced significant gallon increases this past year, some as high as 20% to 25% year-over-year, as a result of the steel deployed in recent years.
Looking ahead, consider this year’s growth. After a busy year, with more new tank sets and a surge in oil-to-propane conversions, this could be one of your best years yet.
To that end, estimated winter sales should be revisited at the end of summer. Adding gallons to your winter term volumes in September is much more cost-effective than scrambling for emergency gallons in January or February as we saw this past year with premiums north of 50 cents over term. Compare your previous spring and summer growth to this year’s numbers to determine how many additional gallons you’ll need for the critical winter months.
If you need additional volume, reach out to your term suppliers — and those looking to win your business — and have them bid on those additional gallons. If you can secure supply with a storage-positioned supplier where you can lift nonratably, all the better. Make sure your carriers are prepared for the increased volume. If you haul your own supply, consider hiring an outside carrier to handle the overflow gallons. Saving a few pennies but risking a supply shortfall simply doesn’t make sense.
This year promises to be one of the most volatile in recent memory with many unknowns. You must actively work your supply plan or run the risk of higher costs — or worse.
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