The Benefits of Arbitrage

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The Benefits of Arbitrage

By Sara Hordinski, Schneider Electric - 04/14/2016

No one knows better than you how difficult today’s market is, especially when it comes to your bottom line. Chasing fuel loads for a tenth of a penny is frustrating to say the least, yet that is what many do.

Finding ways to turn that tenth of a penny into real dollars takes foresight and planning. It takes the benefits of arbitrage (ARBs). Considering ARBs boost volume, margin and your footprint, those who actively seek ARBs typically achieve the most growth by volume and profit.

So, how easy is this and what does it take?

Arbitrage is defined as the practice of taking advantage of a price difference between two or more markets or options. The term “ARB” may be used to encompass the best buy at a single rack, geographic ARBs, ARBs between indexes, PADDS or origin points, and market timing.

Examples of ARBs

Consider “best buy at a single rack.” This is an ARB you deal with each day. However, do you tend to rely on your established relationships? Do you know all the suppliers in your market and surrounding ones? Do you have credit with all those suppliers or know what it takes to get credit? Do you actively engage in day deals with all your suppliers, and are you available to them when they want to move product?

These are things to consider as you make decisions buying low rack. 

Geographic ARBs have many of the same rules as best buy, but it includes knowing suppliers in your surrounding markets and having a relationship with them. Ask your suppliers about their other markets and understand where they typically need volume lifted. Understand if there is seasonality to consider. 

More importantly, how far are you looking, or are you casting your net wide enough? In recent months, an ARB between cities 200 miles apart fetched an ARB of 55 cents a gallon!

But can you anticipate a geographic ARB like the one mentioned? You can if you consider the ARB between PADDs or origin points. Watching the spot market will prepare you to capture geographic ARBs. Watch for the spread to widen and start considering the possibilities. Educate yourself on basis in your market vs. others. Understand which suppliers ship the most barrels to those markets. Ratability for pipeline space is a must for suppliers. If you are willing to move barrels when needed, the discounts will be there — all you have to do is ask.

Another ARB worth mentioning is between different published indexes or around market timing. Buying fuel tied to contracts with different market timing, like same day or previous day, creates opportunity. 

Consider all your buying options. Do you have a balanced buying portfolio? A balanced buying portfolio hedges your risk. Of course, you need ratable business to engage in supply contracts with your suppliers. What percentage of your buying can you commit to a contract? Do you have the right customers to match to the right contracts? How flexible will your supplier be if you cannot lift? Do you have access to all pricing options? What is the best mix for your organization? 

Yes, you must lift your contracts, and they are not always low rack, but the spreads between those contracts regularly bring real value. Don’t forget, contracts secure supply. You never know when there will be a disruption in supply. 

Keys to Success

None of this really matters, though, if you don’t have the truck time or the carrier relationships. Nothing is worse than being able to save money or make money and not have a carrier. Consider for your organization the right mix of your own fleet and common carriers. Are your drivers and common carriers carded everywhere you need, or far enough away? 

Ratability is just as important to carriers as it is to your suppliers. Are you willing to spend money with a carrier to stay ratable? Do you send them business and can they count on your business, too? 

Being able to track this is critical. Have a report card for not only your own fleet, but your common carriers as well. You must be able to quantify your success in chasing ARBs. 

Communication between supply and logistics is fundamental to capturing ARBs. Both departments must be on the same page and have shared goals, metrics and rewards. Of course, this takes communication. Once that opportunity is identified, you must be nimble in your organization between departments and be able to reroute trucks. Having both shared goals and shared rewards is a great motivator.

You need a method to track your success (and failures). You need to understand how big the opportunity is, how much margin can be captured, how many loads you can shift, and whether there is a risk of a runout. Finally, you need to know if it was lifted correctly, and if it worked or why it did not. 

Each organization has a move threshold in cents per gallon. Do you know yours?

When to Avoid ARBs

Of course, there are certainly times when you cannot seek ARBs. You may need to pull a contract, or the savings may simply be too far away. It could be an issue of no allocation, or a driver may not be carded. Further, you could be facing a customer runout situation, a lengthy delay at the rack, or a reduced price at a closer location. 

Whatever the reason, you may not be able to chase an ARB, but you can never chase an ARB if you aren’t prepared to do so. 

The best thing about ARBs is they prepare you and lay the foundation for when it is “crunch time.” Whether it is a seasonal outage, a weather event, or a pipeline or refinery disruption, you know where to go and you have the process in place. You have the supply options, allocations, supplier credit, truck time and carrier relationships. 

Perhaps, unlike your competitors, you have the ability to supply your customer, and the opportunity to make money in a difficult market.

Leveraging Analysis Tools

As technology progresses, businesses need to be all the more innovative in their approach. Pairing the above suggestions with a real-time price discovery tool that consistently tracks costs in order to determine varying factors is essential. It helps you to compare prices, see how the cost of transporting product will impact pricing, and automatically calculate freight costs.

Through the use of innovative software, prices are fed into the solution in a number of different ways including traditional messaging, price retrieval, custom price entry or upload, manually changing a price or through price formulas. Using these analyzing tools will determine whether an ARB opportunity is ideal or not. With these advanced tools, you are in the best position to identify and execute an arbitrage.

Acting on ARBs will give your organization a clear financial advantage over your competitors. When you recognize an ARB, act on the opportunity immediately. 

Stop chasing after that tenth of a penny and instead see real dollars in your pocket as your volume and footprint grows. Say “yes” to the benefits of arbitrage.

Editor's note: The opinions expressed in this column are the author's and do not necessarily reflect the views of Convenience Store News.