HEADS UP: Don’t miss tomorrow’s video, where I will be interviewing Michael Clark from BAMWx.com. If you watched last week’s video (linked here), we talked about the El Nino watch that has been issued and why not all El Nino’s produce the same winter weather. Clark and his company are favoring more of a Modoki El Nino event vs a traditional, basin-wide event (which we had in 2016-2017) and how those can favor great winters for our industry. Tomorrow, Clark will share his research into Modoki El Nino winters and their resulting temperatures during December through February. He shared one of the maps with me today, that I will be sharing with you tomorrow. Needless to say, many of you will be excited at the potential that is out there if we do experience a Modoki El Nino event. Again, click here for last week’s discussion, where we also explain what a Modoki (Japanese word for ‘same but different’) El Nino is.)
PROPANE PRICES: Another sideways day yesterday. Conway was up a quarter cent on the daily average from Tuesday, while Mt Belvieu was down a quarter cent. There was similar to less movement out the curve in the winter contracting months.
These sort of ‘flat days’ were common when I began wholesaling propane in 1996, but they are rare events in today’s world of hyper volatility.
BUYING IN THE DIPS: I tossed out a phrase in yesterday’s video and wanted to dive a bit deeper here today.
I mentioned the outlook for propane exports may be weaker over the next month or so, given some work that one of the largest propane exporters is going to be doing on their export facilities. The expectation is that export numbers could fall off during this time, but return strongly during the second half of the summer and into the fall.
If this plays out, we could see a scenario where propane prices soften a bit, both in the near term and out the curve and into the winter. This would create opportunities for propane retailers to ‘buy in the dips’ as they could be short-lived events.
This export facility work is not the only factor out there. We still have significant geopolitical risks aplenty right now that could more than offset a drop in exports (say, if China slaps tariffs on US crude oil), which would likely lead to stronger propane inventory builds. However, we need those stronger than normal inventory builds.
This is where buying in the dips comes in. I am of the opinion that the propane marketplace is ‘under bought’ right now, meaning that a number of retailers as well as multi-state marketers, like ag coops, have a lot of fixed-price, winter contract buying to do.
So when dips present themselves, it’s going to be a crowded field of potential dip buyers, which means the dips may not last very long.
One of the best strategies a propane retailer can apply in relation to getting a price they want for fixed price contracts is to take as much control of the process as possible.
Don’t rely on your sales rep to let you know where prices are. This isn’t a dig on sales reps; I was one for my entire time in the energy industry before launching this consulting endeavor earlier this month.
Rather, it’s a means for you to take control and ‘work the system’ a bit. Let me share some ‘inside secrets’ with you.
Most propane wholesale divisions have traders who are gatekeepers. They set and establish prices based on market movements as well as corporate needs. Every corporation or company is different and they are all working off different economics, which is why you can see price fluctuations from wholesaler to wholesaler. Some days, company A might have the best price where another week later, company B could have a better price.
There are times when the traders might make a move on an opportunity for some volume at a margin less than they would normally like to get, because those volumes will give them some gas to play with on the trading side. It’s like waving a piece of raw meat in front of a hungry tiger…the tiger would rather chase after his prey, stalk it and kill it himself. But hey, if you are just going to remove the hide and give him the goods and he doesn’t have to do anything for it, he’s not above a freebie now and then.
Such is the way of many wholesale trading divisions. In our example, the piece of raw meat is represented in the form of a buy order.
You tell your sales rep that you would be willing to buy X gallons at Y price. The larger the X, the more likely you are to get your Y, by the way, as trader’s eyes get bigger the more raw meat you wave in front of them.
I have seen more examples of this that I can count, where the trading markets are not quite to the point where a wholesale shop would normally market the gas at the price you have requested, allowing for the profit margin they typically want to fetch on fixed priced deals…yet the trader is aware of that buy order sitting there…ever so close…and he or she will decide to execute the deal because they believe they can spin those barrels off in a trade to a counter-party and make up the difference in the inferior sales margin, and then some.
They will typically do it for the ‘and then some’ opportunities.
You, as a retailer, can’t know what those opportunities are because they differ from day-to-day and shop to shop. However, if you have a buy order in place, you stand a much better chance of getting the price you are looking for as opposed to just waiting back and relying on your propane salesperson to call you when it gets there…because in fairness to that salesperson, they have dozens of clients to reach out to when those dips happen, and by the time they make a few calls, the dip opportunity could be over.
To that end, I’d also put in buy orders with more than one of your trusted suppliers, and I would let each supplier know that you have the same buy order for the same price and volume with another wholesale company…and before executing the deal, to check with you to make sure you haven’t already done the deal with someone else.
IMPORTANT: A buy order needs to be a firm commitment from you that you will buy the gas if the supplier will get you that price. I would make clear with your suppliers that you want a confirmation call before contract execution ONLY in the case of the last scenario, where you want to create urgency on the part of the wholesaler and let them know you are also looking at other options. This SHOULD NOT be used as a way to ‘back out’ of a buy order. You can always remove a buy order, but it is best to do that well before someone takes you out…because you risk burning a bridge with one of your trusted suppliers, and that is never a good idea.
So to accomplish ‘buying in the dips’, you should accompany that plan with a ‘buy order’ strategy, to give you the best chance of meeting your goals. Work the system a bit and take control where you can. I have helped a number of my clients employ this strategy through the years to very positive ends. This is a strategy that can work for you, but as I advised above, do not abuse it. Leverage and competition are good things, but maintaining honor and integrity with your supplier relationships is a must.
It’s like fishing with a trotline….one line (buy in the dips strategy), but several hooks along the way (buy orders) gives you your best chance of catching a fish as opposed to just one hook (waiting for your salesperson to call you).