Fuel Bunker Price: How to Keep Control

Imy Clarke - On behalf of Alchemy Recruitment, August 6, 2014

In an industry where fuel is everything, shipping companies can find the associated costs of fuel hard to stomach at times. The prices soar and plummet with supply and demand, seemingly according to the whims of the fossil fuel magnates. Yet, there are ways for shipping companies to maintain some sense of cost control.

Fuel bunker hedging ultimately allows you to take control of your fuel budget with some calculated risk management. Through contracts you can negotiate and fix bunker prices at a certain level for a certain period of time. The trick is getting the timing right.

Fuel, especially the oil market, is one of the most economically volatile areas of industry. As fuel bunker prices are a significant part of shipping operational costs, a good hedging strategy makes for pro-active insurance against cost fluctuations. By taking into account current financial positions, fuel consumption and risk attitude, any oil risk manager or adviser will help to create a fuel bunker strategy from an exposure analysis of your business.

Yet, clearly there’s still risk. If you were to lock in for a fuel price of $650/MT, and the average price of bunker fuel for the next month works out at $625/MT you do make a loss. So, are there any other ways to give fuel price control to a shipping company? The answer simply is yes. Hedging has many different variations: swaps, call options and collars, allowing you to fix prices within price ranges. For example with a collar, you could arrange a lower limit of $560 and an upper limit of $600. Between these two prices you pay the going rate, but should the price rise above $600, you pay no more than this figure. Similarly, should the price fall below $560, you will still have to pay this higher, agreed price.

Shipping companies shouldn’t necessarily depend on bunker suppliers, banks and other traders for their hedging strategies. They will almost always have only their own interests at the forefront of their minds. In 2009 54 oil tankers were moored in various locations around the UK, ordered not to deposit their cargo of oil in port until the prices had risen so that the oil companies could gain more profit. Although, some tankers were still selling barrels of oil to the highest bidders directly from the ships. While shipping companies can try and gain some control over the prices they pay for fuel, the primary control is still in the hands of producers and owners, and their multi-million dollar yachts.

Posted in categories: Costs and Expenses
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