Stay with us on this one. Some might call this a difficult subject, but it doesn’t have to be. Though you shouldn’t consider a brief blog on Spot Markets the beginning and end of the subject, this should help demystify some often-heard but rarely explained fuel industry jargon. (It’ll also impress friends and neighbors who can’t wait to hear all you know about the subject. But it might be better just to send them a link to this page.)
What Are Petroleum Spot Markets?
What's In a Name - Spot Markets
Problem Solved: The “open market.” The only tried-and-true system that would establish trust in oil and gas prices was to allow the valuation of both to be subjected to the ebb and flow of the open market, or “exchange”—a place where suppliers and users could buy and sell petroleum products in public, unhidden, counting on open competition to stimulate pricing according to what the market will bear. That’s where “Spot Markets” come in. A Spot Market is not so much a place as it is a system where competitive prices are generated. It’s essentially the stock market for commodity oil. It’s where people all over the world, trade, broker, buy, and sell refined petroleum products. For even more detail, check out the modern Spot Market NYMEX and the companies that monitor Spot Markets for the petroleum industry: CME Group, Platts, Argus, & OPIS.
Think of the petroleum product pipeline infrastructure (say that 3 times fast) like the sprinkler system that circulates beneath your lawn. It’s designed and constructed to deliver water to the various areas, or zones, of grass in your yard—like the front and back, the sides, the bushes along the walkway, and the garden fed by drip irrigation—through an interconnected system with a source of water, a means to distribute it, and many thirsty destinations ready to put it to use. If just one sprinkler head breaks, pressure in its entire zone can be lost, shutting down distribution and negatively impacting needed delivery. And it could get even worse: imagine a breakdown at the water’s main source: All the sprinklers would lose pressure, putting every zone out of commission and causing a total system shut-down.
Petroleum (gas, diesel, jet fuel, etc.) pipelines and refineries are similar to your backyard plumbing—they’re also laid out into zones—or Spot Market “regions”—that have been carved out by the petroleum industry. The regions, though loosely linked to each other, contain their own intra-connected, petroleum production and distributon network. So, a refinery problem in one section of a region (zone) can acutely affect the rest of that region. That doesn’t mean regions never influence each other’s supply and pricing. In fact, a refinery shut-down in New York can impact the flow of fuel in Florida, and a pipeline problem in West Texas can tighten flow in California. This linking of zones is particularly obvious when a natural disaster strikes. Remember Hurricane Ike in 2008? Though it mainly targeted the Gulf Coast, gas prices hundreds of miles away in Georgia and South Carolina, and over a thousand miles north in Michigan and Illinois, skyrocketed! But it’s within each individual region, mostly influenced by its own localized conditions, that prices typically move up and down together.
The 7 geographical, Spot Market regions in the continental United States are:
- New York Harbor
- Gulf Coast
- Group 3
- Los Angeles
- San Francisco
- Pacific Northwest
Products and Other Spot Markets
The following refined products are traded in the Spot Markets in the United States:
- RBOB Regular Gasoline
- Diesel (Ultra-Low-Sulfur No. 2 Diesel Fuel)
- Jet Fuel
- No. 2 Heating Oil
Certain non-refined petroleum products are also bought and sold on their own Spot Markets, including:
- WTI – Cushing, Oklahoma
- Brent – Europe
- Mont Belvieu LDH Propane (OPIS) Futures
- Conway Propane (OPIS) Futures
- Central Appalachia
- Northern Appalachia
- Illinois Basin
- Powder River Basin
- Uinta Basin
So Why Do I Need to Know About Spot Markets?
Chances are, if you’re reading this post, you purchase wholesale fuel. It’s volatile pricing puts a lot of your money on the line. If you want to predict the movement of gas prices, watching Spot Markets is the way to go. As they say, “As goes the Spot Market, so goes fuel prices.” Though there’s no guarantee, if spot prices are on the way up, you’ll probably want to buy sooner than later. Going down? You may want to wait to order, giving you an opportunity to buy at tomorrow’s potentially lower price.
Using Spot Markets to Predict The Price of Fuel:
This is a simple one.
- Locate your state on the Spot Market map above.
- Note: If your state borders more than one region, your prices can also be affected by what’s happening in those neighboring regions.
- Track your region’s Spot Market to know the direction prices are moving.
How to Monitor Spot Markets?
Download PowerFuel for your iPhone. It’s free for Desert Fuels customers and only $10 a month for anyone else. Learn more about PowerFuel. Want to see a comparison of petroleum spot market monitoring tools read this comparison.
3 Essential Facts about Petroleum Spot Markets to Takeaway and Remember:
- Spot Market prices are the BEST way to predict the price of fuel.
- Know where your region’s spot prices are heading.
- Gas and Diesel prices generally move together within a region.