On 5/16/06, Kiran Jonnalagadda <[EMAIL PROTECTED]> wrote:
I don't get this business. Exactly how does First Fuel Banks stand to gain if customers only withdraw fuel when regular market prices are higher? Are they banking on fuel prices crashing?
First of all, from looking at their website, it looks like a prepaid service. So they are operate with a good amount of float. More significantly, they take as much risk as they are comfortable with, and beyond that buy insurance from others who are willing to sell it in the form of Oil futures. From the article: == That's enough capacity to handle short-and medium-term demand, he said. For people holding onto reserves for a year or longer, the company hedges its obligations by buying gasoline futures contracts on the New York Mercantile Exchange. == The premium on a futures contract is decided by the market. One would suppose if everyone in the world thinks oil will keep rising, then the premium will be high enough to factor in the higher risk. Conversely, that the futures are being sold at a 'reasonable' premium means there are people who are betting the other way as well :-) In general, 'near term' (< 4 months) prices and futures prices are strongly related. A Federal Reserve Bank of San Francisco study[0] published in 2005 came to the following conclusion: == Oil futures prices contain important information about future oil price movements, especially for the near term. In particular, taking into account the relationship between current spot and futures prices instead of considering only the raw futures price can significantly improve forecasting accuracy. Prediction errors, however, are still substantial, and accurately predicting the future price of oil seems as elusive as ever. == More musings on this 'bizzare' business of Oil Futures: economics.about.com/od/theoilsupply/a/low_oil_futures.htm economics.about.com/od/theoilsupply/a/oil_future_und.htm -Karra [0] http://www.frbsf.org/publications/economics/letter/2005/el2005-38.html
