Capped Fuel Price Protection allows you to set a limit on your fuel price based on an initial up-front fee, meaning you will never pay more than the agreed rate, based on a nominated volume per month, for up to 24 months in advance.
At the end of each month, a settlement will be calculated based on the variance between your capped rate and the average price of fuel across the month. If the average price is above your capped rate, Portland will then credit the difference, multiplied by the nominated volume for that month. If the average price is below your capped rate, no transaction is conducted on either side as you have paid an up-front fee to take advantage of low prices when the market falls.
As this is based on a monthly transactional settlement, you are still free to purchase fuel from your usual supplier(s), with no change to your daily operations.
Birch Hill Produce are an agricultural company using 50,000 litres of diesel in the harvest months, when trade is at its busiest. It is critical to Birch Hill that they do not pay more than $0.80 from July to September, but they also want to take advantage of any falling fuel prices in the period.
Therefore, Birch Hill buy a capped price of $0.80 in advance and pays Portland a 1.00cpl (cents per litre) fee for the full period up-front (1.00¢ x 50,000 x 3 months = 150,000 cents = $1,500) but continue to buy their fuel in the normal way from their usual fuel supplier(s).
In month one, a tropical storm in the Gulf of Mexico causes oil production to cease, creating a supply shortage. As a result, the average price of diesel across the month rises to $0.82 per litre.
As the average price is 2 cents higher than the agreed capped rate, Portland owes Birch Hill 2cpl. On 50,000 litres that is $1,000 paid by Portland into Birch Hill’s bank account (50,000 litres x 2¢ = 100,000 cents = $1,000).
In month two, global oil stockpiles begin to rise, indicating low demand and causing the price of oil to fall. As a result, the average price of diesel across the month falls to $0.78 per litre.
Birch Hill pay nothing because they chose to cap their price which requires a one-off, up-front fee, allowing them to take full advantage of the falling market. Portland pay nothing as the $0.78 price is lower than the agreed $0.80 capped price.
In month three, trade sanctions on an oil-producing country restrict exports, causing global supply to fall. As a result, the average price of diesel across the month rockets to $0.84 per litre.
As the average price is now 4 cents higher than the agreed capped rate, Portland owes Birch Hill 4cpl. On 50,000 litres that is $2,000 paid by Portland into Birch Hill’s bank account (50,000 litres x 2¢ = 200,000 cents = $2,000).