One of my favorite movies of all time is the 1985 classic Back to the Future, starring Michael J. Fox. The movie featured a plutonium-powered DeLorean that carried “Marty” and “The Doc” backward and forward in time while they stirred ripples across the space-time continuum. The downstream fuel industry, powered by the price of crude rather than plutonium, is similarly experiencing a ripple effect where the time-money continuum is impacting supply chain participants. In the spirit of this movie and its sequels, I am sharing my perspectives in a series of three articles focusing on what the fuel industry needs.
Recent analyst forecasts are now targeting $120 per barrel by June 2022. The upward trend is a boon for refiners, but brings along with it the aforementioned ripple effect. The first ripple effect is credit risk. Refiners will assess risk across their portfolio and reduce volume allocation to match the new price realities and/or require a larger cash deposit from wholesale customers. Wholesale customers in turn will survey their customer portfolio and execute similar tactics. All of this is occurring at a time where demand is recovering swiftly from the pandemic as the world starts moving again.
The paradox exists because there is an incongruence between when fuel products are delivered and when payment for that delivery is made. The difference in time can be as little as 10 days, or as protracted as 45 days. Making matters more consequential is the fact that the average transaction is currently valued at $25,000 and projected to rise along with the price of crude in the short term. This phenomenon of cash-float between market participants is not new, but it becomes increasingly problematic as prices rise.
This is where the notion of a “time machine” for the fuel industry comes in. The refiner wants time to move forward faster, thus realizing revenue as soon as possible while simultaneously mitigating risk exposure. The Wholesale customer base of the refiner wants to slow time down, preserving cash flow and better aligning their payables to the refiner with their own receivables. Ideally, a model where both get what they want is achieved, as this harmony will yield operational efficiency all the way down to the consumer level.
I believe this harmony for both fuel buyers and sellers exists and I’ll share more perspectives and strategies in my upcoming posts.
