Oil and Gas

The Benefits of Arbitrage

No one knows better than you how difficult today’s market is — especially when it comes to your bottom line.  Chasing loads for an extra 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.

Arbitrage Defined

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

Best buy at a single rack: This is an ARB that you deal with each day but you may not be asking all the questions to make the best decisions:

  • 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?

Geographic ARBs: They have many of the same rules as best buy, but finding geographic ARBs means knowing suppliers in your surrounding markets and having a relationship with them. In addition, how far are you looking, or are you casting your net wide enough?  In recent months, an ARB between cities two hundred miles apart fetched an ARB of $.55/gallon!

To anticipating geographic ARBs, consider the ARB between PADDs or origin points. Watch for the spread to widen at spot markets and start considering the possibilities. If you are willing to move barrels when needed, the discounts will be there.  All you have to do is ask.

Keys to Success

None of this really matters if you don’t have the right pieces in place to find and execute ARBs. To ensure you have as many options as possible, stay up to date with the following:

  • Maintain trusted relationships with suppliers so they know to call you when they have product to move
  • Make sure your drivers and common carriers are carded everywhere you want to pull an ARB
  • Stay ratable with your key carriers by maintaining consistent business relationships

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.

When it makes sense to avoid ARBs

Of course, there are certainly times when even if you can capture an ARBs, it may not make good business sense, such as:

  • The need to pull a contract
  • The savings aren’t ideal
  • Facing a customer run-out situation
  • A lengthy delay at the rack
  • Logistics costs outweigh the savings
  • 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.

Crunch Time

The best thing about ARBs is they prepare you for when it is “crunch time”.  Whether it is a seasonal outage, a weather event, 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.

A Clear Financial Advantage

Acting on ARBs will give your organization a clear financial advantage over your competitors. When you recognize an ARB as a valuable opportunity, act on it. Stop chasing after that tenth of a penny, and see real dollars in your pocket as your volume and footprint grows. Say “YES” to the Benefits of Arbitrage.

To learn more about Schneider Electric solutions that can help you better take advantage of ARB’s, click here.

 


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