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Locking In A Price—Choose The Right Contract

Some petroleum marketing companies can offer a variety of contracts, each with distinct advantages and disadvantages, similar to those below which are available through Simons Petroleum, Inc., Oklahoma City, OK. All contracts start with a fixed firm price determined on the day the contract is initiated.
• Locked Fixed/Firm/Contract — a contract for X-number of gallons at a fixed price.
Advantages: Cost control, no cost to implement. Use fuel as needed, pay as used.
Disadvantages: Prices could decline and stay below the contract price.
Notes: Traditionally used where a true hedge is desired. Also, for any time it is advantageous to lock in a fixed cost, i.e. for a specific haul, contract, or client.
• Flex Term Contract — a contract for X-number of gallons to be used within X-number of months at a separate price fixed for each of those months.
Advantages: Cost control, no cost to implement, can take gallons based upon market conditions/expectations. Use as needed within fixed time frame, traditionally 3-4 months.
Disadvantages: Usually limited to three/four month terms. Requires decisions be made throughout contract period, prices could decline and stay below the contract price.
Notes: The flexibility in the contract allows for great benefits with favorable execution.
• Ceiling/Floor Contract — a fixed price contract with predetermined cutoffs both over/under fixed price. Never pay above the ceiling, never pay below the floor.
Advantages: provides fuel cost parameters, no cost to implement. Use as needed, pay as used.
Disadvantages: Prices could decline and stay below the floor price.
Notes: ideal for situations where carriers benefit from limiting upside exposure, but can pass through the floor price to clients. Also very useful for time periods when you expect modest volatility but where a dramatic price increase would be damaging.
• Ceiling Without A Floor Contract — a fixed price contract with predetermined cutoff over fixed price, but no restrictions on how low the price goes.
Advantages: fully protects against spikes with full participation in price declines. Use as needed, pay as used.
Disadvantages: 1.5¢ to 2¢ per gallon cost to implement
Notes: For situations where client benefits from limiting upside exposure, but can pass through the cost.

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