Locking in fuel prices

[Legacy]

I'm just an advertising guy and know next to nothing about buying oil. May only be able to lock in for a few months. With oil trading below $40 a barrel today, how can boaters take advantage of these prices, especially for diesel? For example, can I ask our marina owner to offer a bulk buy to the larger boats and then go to one of the larger fuel docks and lock in a contract price? If 30 boats each committed to a specific number of shares/gallons, maybe we could save ourselves significant dough.

Thoughts?

Rick

[RicM]

Rick,

The issue is storage and not ending up upside down on your contract. I doubt very much that this would be worth your while. If you buy fuel now at the current price you will have to pay someone with big tanks to store it for you. Doubtless others will be bidding on storage space as well, raising the rent. By the time you pay the storage until July-August you will probably eat up most of the savings IF the price of diesel goes up. It is very possible that the price of diesel will go down. The price at the moment is above gasoline due to lack of refinery capacity devoted to low sulfur diesel. Because diesel is more profitable at this moment more capacity will be devoted to it. If the economy stays sluggish the price of diesel could well come down below $2, closer to the historic price relationship to regular unleaded gas. Then you will get clobbered with high price fuel PLUS storage cost. There would seem to be little upside and a possible disastorous downside. The cost to dig up a barrel of oil and put it in a tanker is about $2/barrel. The likelyhood of $147 barrel oil and $4 diesel in the next few years is extremely small. That was a bubble that has burst and it's over. Don't fight the last war. Most people in the oil industry agree that the real value of a barrel of oil is about $50-$80 max. For the amount of fuel we use in a season the odds are against you winning big on this. There's a lot of airlines that hedged fuel at last summers' prices that are taking the royal shaft right now.

[mackidaddy]

Here is another suggestion:
Buy an oil ETF as a hedge. This is an index fund whose price movement closely correlates to the price of oil and the management fee is pretty low. (Not sure if there is a diesel ETF out there, i doubt it).
Anyhow, if you think oil is going higher, you could buy the ETF. Then if it goes higher, you could sell at a profit to offset your potential higher costs at the fuel dock without the storage costs Ric mentioned. I haven't tried this before, but I am contemplating it. Be sure to do your own research on the risks of this type of approach. Good luck. Let us know what you decide to do.
Actually, if this isn't a good idea, don't hesitate to let me know. Thanks.

[RicM]

It's an excellent idea, and while I'm not authorized to advise you on specific investments here's 2 examples, MacroShares Oil Down ETF (DOY), MacroShares Oil Up ETF (UOY). Their names make their intentions obvious. But seriously, how many gallons do you burn in a season? I did about 450 gallons over 150 hours last year. A dollar up or down, per gallon, doesn't really seem worth the effort, sales commision etc. Just go fishing and relax!

[Legacy]

Thanks for the thoughts guys. Actually, the fuel dealer I'm thinking of approaching moves a lot of volume as most of the commercial boats (ferries, coast guard, tugs) use them all year. So if we "bought" fuel now, he'd pocket the profit and then we'd just draw down over the season from his tanks that are always being refilled. So no need for distinct storage as he's already moving tons of product now, just prepaying like we do with our home heating oil dealers. I burn at least 1200 - 1400 gallons per season (thanks to a very bad tuna habit) and if I save a buck or two per gallon it adds up. I know most guys don't burn that kind of fuel but a bulk buy of 10 to 20K gallons might save a little and also lock in the price. Will let you know what I decide!

Rick

[jleonard]

I used almost 100 gallons last season. (Close to 70 hours)
So please don't count me in on this

[Legacy]

That's what I told my wife I used!

[Mariner]

I second the idea of an oil ETF, but only IF you are willing to stake big money on the fact that oil will go up.

Personally, I view the 420 gallon capacity of the boat itself as all the reserve I need. Fill it in the winter, use it in the summer.