The recent drop in crude oil process has left an impact in all areas of business. The price of oil effects the entire economy. The main reason for this is because when gas costs are lower the cost of shipping items goes down. This is reflected in the prices of various items throughout the market.
Businesses can protect themselves from the rise and fall of gas and oil prices by fuel hedging. This contractual tool allows a company to cap or fix a fuel price at a specific level for a specific amount of time.
Why use fuel hedging for your business?
If your business is exposed to the fluctuation of prices in the oil market, hedging provides a tool that can help eliminate some of the risks involved of the fuel budget going out of control. Here are some reasons why fuel hedging is important:
- The gas and oil market is volatile and the prices of oil fluctuate a great deal
- Oil costs represent a large portion of operational costs
- Provides insurance against price fluctuations
- Provides a proactive strategy for protecting a company’s budget
Example of a short hedge futures investment for oil companies
One of the ways an oil producer can hedge against lower prices is by taking a position on the futures market. A short hedge can be implemented in order to lock in a future selling price for crude oil production that will be ready to sell at some point in the future.
For example, an oil company may enter a contract to sell 100,000 barrels of oil that will be delivered in 3 months. The sale price is set at the current market price of $44 a barrel. The company can lock in this price for the 100,000 barrels using a short hedge. This means that even if the price of oil drops in 3 months, the company is still guaranteed to make $44 per barrel.
If the price of oil goes up during the 3-month time span the oil company may lose money on the contract. However, the hedge has created a buffer to stem any losses that may have occurred should the price of oil drop. Hedging essentially provides a buffer from huge losses, but can also lead to profit losses if the market turns and the price of oil goes up.
Long term hedges for businesses
In the same way that oil companies can hedge the price of selling future oil that is being produced, a company that uses crude oil can use a long hedge in order to secure a purchasing price for the commodities that are needed.
Crude oil futures are traded by companies and individuals who will assume the price risk that hedgers are trying to avoid. They will buy oil futures using trading platforms, such as those offered by Binary Uno, when they believe the price of the oil may go up. Conversely, if they believe the price of oil will go down, they will use the same platform to sell their futures – hence make their profits from making the correct guesses as to where the oil futures prices will end up.
Conclusion
Overall, long term and short term hedging against oil prices can be beneficial for both oil companies and individual business owners as it provides a form of insurance against fluctuating oil prices. It is important to have a plan in place for your company regarding the price changes of oil. Hedging allows companies to create a more accurate budget for their overall costs, which is extremely important for all aspects of business planning.
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