Commodities

The What, Why & How of Fuel Hedging

Your complete guide

Scroll to read:

  • Quick history of hedging
  • How fuel hedging works to protect your gross profit margins
  • Why Fuel Lock is a breakthrough tool for UK hauliers
  • More about Foenix Partners
  • Pricing & payment details

If you have any questions or would like to talk to a fuel hedging expert, please get in touch.

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A Quick History of Hedging

What is hedging?

The term ‘hedging’ means to place a fence or ‘hedge’ around your financial risk to offset or mitigate it.

Hedging began with US grain farmers in the mid-1800s, who wanted to protect their purchases from future price rises, usually due to weather or other adverse events. This spawned the Chicago Board of Trade – the first recognised exchange.

Since then, hedging has become an accepted and widely used term in the financial world to describe risk management.

What is fuel hedging?

Fuel hedging is a proven financial derisking strategy that’s been used by large multi-national companies for 40+ years via investment and corporate banks.

It’s designed to offset fluctuating physical fuel costs against a ‘fixed’ rate (known as the ‘Forward Swap’ rate), which is forecasted using the oil futures marketplace.

The outcome is cost certainty, flow visibility and peace of mind – undeniably beneficial for any fuel-dependent business.

Why is it needed?

Fuel price fluctuations, primarily driven by changes in the underlying ‘traded diesel benchmark’ (Platts), are often passed on directly to you by suppliers or at the pump.

The Platts price constantly rises and falls in direct response to crude oil prices – the most volatile top tier asset class. So even if your business seems far-removed from volatile financial markets, one of your most significant costs is completely determined by fluctuating oil markets.

Fuel hedging brings certainty to an area where you’re currently at the mercy of these market fluctuations.

Why can’t my supplier just fix fuel prices?

Some suppliers will offer to fix the price of your fuel. But they see this as a risk and will only consider it when advantageous to do so.

Suppliers know that at any time a major event can send oil prices skyrocketing, so they can only fix prices with significant restrictions and for a very short time.

Who can use fuel hedging?

Since there’s no direct access to the oil futures marketplace, historically only large UK hauliers or listed firms with turnovers of >£100m+ (e.g. airlines) could take advantage of fuel hedging, and only through their banks in return for a fee.

Banks have to adapt over-the-counter solutions for each individual company, resulting in oversized minimum trade sizes.

But our groundbreaking tool, Fuel Lock, has changed the landscape entirely.

Now, the door is finally open for all UK hauliers to protect their finances through fuel hedging.

Introducing: Fuel Lock

Fuel Lock is a one-of-a-kind, specialist hedging tool offering UK Hauliers budget security by fixing future fuel prices without changing suppliers.

Most hauliers and logistics firms, perhaps yours included, feel forced to simply accept fuel price fluctuations from suppliers or at the pump, despite the significant risk to gross profit margins.

This exposure can be totally avoided.

At Foenix Partners, we’ve spent years building Fuel Lock – an automated system that bypasses the work required to customise solutions and dramatically lowers minimum trade sizes.

The result?

Small and mid cap hauliers with turnovers <£100m can access fuel hedging for the first time.

It’s simple, customised hedging to mitigate your unwanted market risk.

You can:

  • Keep your current fuel suppliers
  • Lock in the price you pay for fuel for 3-36 months
  • Benefit from the same system used by international hauliers for decades
  • Remove uncertainty in the price of your fuel
  • Start small as proof of how effective it is
How does it work?

Step 1: You continue to buy fuel in the usual way with your existing supplier

Step 2: Using the oil futures marketplace, we set a fixed fuel rate – aka Forward Swap rate – for your requested volume and duration (3-36 months).

Step 3: You can choose to start with small volumes to test Fuel Lock’s effectiveness.

Step 4: During this period, fuel prices will increase or decrease daily in line with the Platts price.

Step 5: The average of these daily rates contributes to a month-end figure called the ‘Floating Rate’.

Step 6: At the end of each month, the difference between the agreed Forward Swap Rate and the Floating Rate generates a payment either to or from you, in effect ‘locking in’ the price you pay for physical fuel while the hedge is running.

For example: You book a Forward Swap Rate at 95 ppl at 100,000 litres. If the Platts Floating Rate is 98 ppl, this will generate a month-end payment to you of £3,000.

What’s the business value?

Quite simply: your ability to gain financial certainty and control with fuel expenditure.

See it as good, sound, prudent financial management that improves your ability to forecast.

How will it work for me?

Use our Trade Calculator to find out:

What’s included in hedging costs?

When taking out a financial hedge, the price you see from us includes:

  • The cost of diesel (Platts)
  • UK fuel duty
  • Our fees
About Foenix Partners

Founded in 2011 and backed by billionaire investor & Morningside Holdings (listed on HKSE), we work with individual and corporate clients to offer simple or customised solutions to suit their foreign exchange and commodity market needs.

We hold a specialist FCA license to provide commodities hedging products for UK businesses. Fuel Lock is a tool we developed and implemented to deliver customised fuel hedging to mid-market firms for the first time.

In recent years we were recognised with industry awards for service excellence.

How do Foenix Partners benefit from Fuel Lock?

We’re uniquely able to access the same markets as investment banks and commercial banks using the collective buying power of our customers. These economies of scale offer significant savings to you, enabling us to offer excellent rates, and taking a small percentage as our fee.

Our system means we carry no market risk; we’re simply able to facilitate your access to the markets.

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"Organisations need to be more forward looking"

Executive Vice President and CFO of Haliburton

"As a global enterprise it is important to hedge"

Douglas Bettinger, Executive VP & CFO
Lam Research Corporation

“We are now able to make more elaborate cash forecasts”

Masatoshi Miyamoto, CFO
JVCKenwood Corporation

Pricing details

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How are UK fuel payments calculated?

The price you pay for fuel is made up of 3 components:

  • The wholesale cost or ‘traded diesel element’ (Platts component)
  • UK fuel duty
  • Supplier charges for storage, delivery, margin and retail mark-up etc.

Hedging gives you protection for movements in the wholesale cost and UK fuel duty – this is called the traded price (or sometimes the ‘simplified price’). However, it can’t protect against the commercial costs of your supplier.

How is the wholesale cost determined?

The international cost of diesel is determined by independent price assessment organisation, Platts. This is used by all organisations involved in buying diesel.

The name of this is the ‘Platts – Commodity benchmark ULSD 10ppm Cargoes CIF NWE ((AAVBG00)’.

Any movement in the Platts price will be replicated in your physical purchase prices.

Can anyone check fuel prices?

Yes, you can monitor the day’s traded price and observe the performance of your hedge anytime using our FUEL DATA PAGE.

There is additional historical data on this page for your interest. Many of our customers also find the price information useful in their negotiations with suppliers.

Today’s traded price, forward premium

In normal trading conditions, the price of a commodity is cheaper today than at any time in the future.

This is because there are added costs associated with being able to buy something at a future date or costs of carry (e.g. insurance, transportation and storage). As a result, market prices for future dates typically rise in a linear fashion.

In instances of demand or supply shock, the forward curve can change shape and the cost of nearer dated contracts become more expensive than future dated ones.

When this happens, it’s considered opportune to hedge further out and benefit from the relatively cheap future prices.

Your Hedging Journey

Rates, payments, deposits & terms​

How does the Forward Swap rate work?

In hedging you are setting a price you wish to pay in the future. This is called the Forward Swap rate and is the rate your hedge performs against.

In the case of a fuel hedge, your Forward Swap Rate will be comprised of:

  • Price: in pence per litre (ppl)
  • Volume: at an agreed quantity in ‘litres per month’ (k, lpm)
  • Time: for a set period of months (called ‘tenor’)

When you book a hedge, you are agreeing to fix all these elements.

How are payments calculated?

To break this down further: when you set your hedge, you will determine the volume and number of months (tenor) which is equal to, or is less than, your actual physical purchases of fuel. You will then agree the price for your fuel.

For example: 95.5 ppl for 500k litres per month for a 12-month period.

Every day, the Platts price moves up and down and these market fluctuations are reflected in the changes in all diesel purchases throughout the UK.

Over the month the average daily rates for the Platts price gives a month-end rate, this is known as the ‘Floating Rate’.

Each month, the difference between the agreed Forward Swap Rate and the Floating Rate generates a payment either to or from you, in effect ‘locking in’ the price you pay for physical fuel while the hedge is running.

A few important points to remember:
  • This is called a financial hedge – the profile of the trade is set up to reflect your physical purchases but is not directly linked to them. You continue with existing suppliers in the same way you always have.
  • The hedge covers your exposure to the ‘traded price’ and should not be confused with the total price from your supplier which will includes escalators and/or surcharges.
  • We suggest booking in several steps and not booking your entire floating exposure in a single trade.
  • If you are hedging for the first time we recommend starting with a proportion of your requirements.
  • When you book your hedge you are agreeing to the price you will pay in pence per litre, the rates fluctuate daily and will be determined by the market conditions at the time you book. We will then use your Forward Swap Rate to offset any movement in the price you pay your physical supplier.
How does the month-end settlement work?

The independent Platts price is recorded each day throughout the month. The daily Platts prices are given equal weight and used to calculate the monthly average, this forms the month-end rate.

You are notified of the month-end rate on the first day of the following month.

The settlement is calculated and takes place (a payment to or from you) within 5 business days.

Is a deposit required?

As standard practice across all future or forward trades, those booking a transaction are required to place a deposit as collateral. At market inception this was implemented to indemnify companies and to protect in the case of default. Over time, it has become standard practice and is not based on the company profile or any perceived risks. Foenix is required to place deposit and, in turn, requires it from customers.

Terms

Our standard terms are 5% on total GBP notional (fixed price x number of litres booked per month x number of months hedged). We are happy putting a request to our Credit team for a reduced deposit and this is often successful – you would need to register as a customer first.

Your deposited funds are held in client segregated accounts, in line with FCA regulation. This remains within your company’s cash in hand considerations and we can provide statements upon request.

What is it used for and where do funds sit?

Deposits are held until the expiry of the contract – then refunded in full. The deposit held can also be used as collateral for ‘topping up’ hedges, as time goes by and the months of cover run down.

The deposit sits in a ‘Client Segregated Account’ as dictated under the FCA Safeguarding Requirements. These funds remain part of the client cash-in-hand calculations and are categorised as separate from Foenix’s balance sheet – protecting them in the extreme scenario of Foenix business failure. The FCA sets out detailed rules relating to the protection of client money. These can be found in the CASS section of the FCA Handbook which can be found at: www.handbook.fca.org.uk

Commodities

“The benefit of fuel hedging with Foenix Partners is it gives our company control of fuel costs. I would absolutely recommend them, 5 stars.”

Alan Clarke
Mini Clippers Ltd
Fuel hedging

Case Study

Our fuel clients cover the breadth of the haulage and logistics sector – we are happy to provide testimonials or references upon request, but here is a recent case study.

Company

Mini Clippers are a logistics firm operating a 40 strong fleet offering next day and economy delivery services including palletised and hazardous freight. Like many logistics and haulage companies, they identified in their company accounts that they needed a solution to manage their commodity (fuel) risk, one of their largest and most volatile overheads (for most of our customers, fuel costs are >20% of their overall costs).

Solution

They were introduced to Foenix Partners’ hedging tool, a simple way to mitigate the risk of fuel price fluctuations. After completing Foenix’s quick set up and onboarding process, our team of experts worked with them to create a bespoke trade, hedging 50% of their fuel requirement for an initial period of 6 months with a recent extension for 10 months.

Outcome

The recent upward move in fuel prices meant Mini Clippers’ fuel costs increased, but with their hedge in place, they were reimbursed the difference between the price they hedged and the price they paid at the pump which was 4.89ppl last month!

Here’s what Alan Clarke, Financial Director of Mini Clippers had to say, “The benefit of fuel hedging with Foenix Partners is it gives our company control of fuel costs. I would absolutely recommend them, 5 stars. Thank you for giving us the opportunity for getting fuel arrangements in place.”

Process

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Register as a customer

This comes with no cost or obligation but enables us to create records, re-issue pricing and propose terms.
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Customise your hedging

Deciding the right amounts per month, time frame, deposit availability and assessing pricing.
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Booking the trade

There’s a short pre-trade questionnaire before booking the trade over the phone with a sales trader; full details follow within a Transaction Confirmation.

Want to find out more?

Fill in the below form and one of the team will be in touch.
Alternatively give us a call on 020 7397 3535.