Whether they would admit it or not, every fuel dealer has resorted to guessing the market at some point. “This is the top”, “we are definitely going to sell off”, “no way this can go lower”, “nothing about this rally makes sense”…these statements are nearly universal in our world. To be fair and respectful, they are often uttered by very smart people using really good market intelligence. Alas, more times than not, the market has a mind of its own, contradicts logic with an odd move, and folks are left scratching their heads wondering what they might have missed. And therein lies the problem; they didn’t miss anything! The market simply was driven by forces more complex or obtuse than a mere mortal could understand, never mind predict. Yet, if a dealer truly believes they overlooked that one key piece of data, then nothing will stop them from going with their gut instinct again. Hence, an addiction is born.
It would be hard to find a seasoned business manager who didn’t find abject joy in guessing a financial market. Predicting which stocks are winners, which funds will outperform all others, and where the price of crude and products end up leads to serious bragging rights. It also serves to make us feel like our common sense is more reliable than a technical chart or some market guru yelling into our television screens. While this makes a great hobby and engaging dinner party chatter, it is not a practice that one would employ to safeguard their livelihood.
In very specific terms, trying to guess where oil or propane prices will go is risky business indeed. The implications of being wrong can have catastrophic effects on your bottom line and perhaps your organization’s outright survival. Keep in mind that fuel dealers are inherently “long” demand; there is a certain amount of volume that you will certainly sell, for which margin is budgeted but not yet realized. This is called “margin at risk”, a metric that needs to be understood and then managed with utmost care. It is your life blood and not the domain of guess work.
Fuel dealers are some of the most hardened critics of speculators, and with good reason. So how can it be that these same dealers partake in speculation on a regular basis? This would be a good time to revisit the aforementioned addiction to guessing the market. This addiction is pervasive and extremely dangerous. It is also, in large part, emotionally based like most addictive behaviors. Part of that emotional basis is denial. Many fuel dealers don’t see their guessing as speculation, they view it more as part of their daily routine, something they feel required to do in order to stay a step ahead. In fact, most would be offended that someone dared to call it guessing at all. In the end, it is pure speculation to wait for the price “bottom”, to wait for the inevitable reversal, or to assume you bought in at the perfect time.
It bears noting again that this commentary is not intended to judge anyone. The dealers who make a habit of guessing the market are not doing it because they are ignorant or foolish. Truth be told, they likely have been right enough times to justify their actions. But they probably downplay or dismiss the many more times they have been wrong and the empirical cost in dollars of the mistake. This is amplified by the current era of highly volatile market dynamics which continually baffle the brightest minds, elude all forms of proven analysis, and change sentiment in milliseconds.
This year is proving to be one that is bringing out the guessing addicts everywhere. We had a big sell off in the spring, spent an extraordinary time oversold and ripe for reversal yet continued down unabated. It flips around in recent weeks, moves ever higher on stimulus expectations and mildly positive economic news, and despite being overbought for long stretches, moves up unabated. See the irony in that? By all measures, neither event should happen yet both did.
These conditions and associated guessing have provided a host of rather serious problems for the industry. Many are out selling forward cap and fix programs, getting long on the committed sales side at set retails, and stalling to cover it because of a belief in the impending big cliff for prices. Combine that with a stubbornly rising market and the result is margin erosion every single day you wait. It is an ugly perfect storm. Others bought unhedged heating oil wet barrels in the 2.80’s for rack to retail deliveries believing that those were the lows for the year. Who is right? No one knows…
Physical commodity hedgers know instinctively that margin is king. Locking in the desired margin at the time of sale (or purchase for wholesalers) is the most crucial element in any hedging program. From there, incremental margin can be derived by making nuance changes to buying and selling but at least the main targeted dollars are already in the bank. Guessing undermines this entire process and the resultant waiting could possibly destroy it.
Think of the current oil markets like the weather. Legions of brilliant scientists try to predict rain, snow, and wind. We all know how that usually turns out. Remember how cold it was supposed to be last winter? Like storm tracks, oil prices are fickle and often do things that were totally unforeseen. We are no longer living in an industry driven by supply, demand, and temperature. So, go to rehab for the guessing addiction. Don’t become paralyzed, lock in profits when they are there, and allow yourself a good night’s sleep for a change.
The information provided in this article 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 this article 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 article is at your own risk.
