Fuel rack management is difficult due to several challenges, beginning with the number of buyers and purchasing representatives, and the difficulty of reconciling data across different transactions.
A fuel rack is a distribution point for fuel, usually along a pipeline, and is so named because trucks do actually load at a supply rack where they buy fuel from their distributors. Not only must fuel must be moved to and stored on the rack, but fuel rack prices offer a reference point for the whole supply chain and are often held responsible for price volatility. Fuel rack transactions total around 8,000 gallons and are conducted at 1,500 terminals in nearly 400 market locations throughout the U.S.
Context & Challenges
Fuel rack management faces extra complexity due to the diversity of buyers and their purchasing representatives:
- Distributors can pick up loads for multiple brands/customers
- Distributors can also subcontract delivery to 3rd parties
This complexity creates a unique challenge in reconciling actual supply with corresponding nominations, allocations and invoices, which are tracked with daily averages.
This also creates the potential for fraud and counterfeiting, which can affect quality control but also has the potential to affect the rack price, which then has effects all the way down the supply chain.
The rack price is one of the key wholesale price points in the fuel supply chain. It embeds every cost and margin if supplying fuel from the terminal, inclusive of terminal fees, including blending with ethanol if necessary, the cost of additive packages, and contract premium or discounts.
Individual supply contracts can have different premiums or discounts, for example if they are branded or unbranded, which creates further complexity for distributors.
Fuel rack prices are subject to a high level of volatility, as are rack-to-retail spreads, the difference between the average bulk fuel price and retail prices at a truck stop or gas station.
Rack prices fluctuate up or down every day at 6pm, contingent on the movements of the spot market, which tends to be very volatile. Additionally, price movements and regional price swings are common within the day.
This volatility affect jobbers, retailers, and end users like trucking companies, which are the three main categories of fuel rack users. Jobbers are also known as distributors or marketers, and purchase the fuel to resell it. Jobbers have three buying options: unbranded contract, branded contract, and open rack. Each of these in turn comes with its own terms and risks.
When fuel is loaded, a “bill of lading” or “BOL” is produced, which is a receipt showing a transfer of ownership and detailing where the fuel was loaded, where it was, and the quantity. The name on the BOL incurs the liability for the fuel, meaning jobbers take on a lot of liability during the transfer of fuel and absolve the end users of this risk.
The supply chain is clearly complex and often opaque, which can drive up volatility and uncertainty around prices, creating inefficiency as a whole.
Jobbers incur a huge amount of liability based on the BOL, meaning that if a product is not properly tracked or is counterfeited, they can find themselves in a lot of trouble. Additionally price volatility can significantly affect their margin and their job stability as some companies might no longer wish to hire jobbers if prices do not allow it.
- Retailers in General
Retailers, who are the final step of the supply chain, are the last to change prices and can often take 48-72 hours to respond to rack prices. With growing volatility, this can mean that they lag behind the market which can create inefficiencies and disadvantages.
- Unbranded Retailers
Unbranded retailers are connected to multiple jobbers, receiving price quotes daily from suppliers. However, when the market jumps they might not have access to fuel on-demand. This can jeopardize their business model, with the uncertainty also creating unpredictability.
The Good News
STRATO allows for the creation of an ecosystem including an application to track the status of fuel supply through its useful life, offering the below benefits:
- A single ecosystem with unique memberships and features for producers, distributors, third parties, and brands to use
- Mobile (phone, tablet) interfaces for remote input
- The multi-tenant blockchain database (ecosystem setup) allows for faster and simpler development of other oil & gas operation tracking (e.g., other input, labor, financing)
- A single source of truth for fuel inventory data
- Traceability of fuel allocation through to the distributor/owner
- Improved visibility into rack load and anticipated volumes
- Reduce/eliminate data entry points
- Streamline reconciliation
Any STRATO insurance solution leverages STRATO’s enterprise grade features
- RESTful APIs for direct connection of IoT devices such as storage providers’ iPads to the blockchain network
- Identity Management, OAuth, and SSO capabilities for simplified IoT authorization and user login
- Privacy via private chains to keep data private and control who sees what data
- Enterprise Data Modeling for integration into existing data systems and to ensure interoperability