Fuel purchasing strategy is one of the most critical cost levers for a distributor. The timing, method, and terms of procurement can significantly impact profit margins and cash flow, especially for SMEs with limited storage capacity and capital reserves, we consider buying strategies in detail to help you to decide which is right for you.
Why this matters for distributors
Choosing the right fuel procurement strategy for your business is essential to maintaining profitability, meeting customer demand, and managing your exposure to fluctuations in the market. Distributors face a key choice, weighing up the price stability and supply security afforded by contracted supply against the flexibility and responsiveness of purchasing on the spot market.
This article explores the pros and cons of both strategies, helping you make informed decisions that align with your operational goals and risk appetite.
Contracted purchasing
Contracted fuel supply refers to an agreement where the supplier agrees to supply an agreed volume for a set period, typically 12-24 months, usually priced at a fixed premium above the published wholesale price (known as index-linked pricing).
Product may be made available for collection ex-rack (from the refinery or terminal) or delivered to the distributor’s own storage location/depot.
Buying in this way ensures security of supply for the buyer, whilst ensuring that although prices will still rise and fall with the market, the margin applied by the supplier does not vary.
Wholesale prices are based on published settlement prices (the price at which the market closed on a specific day), that reflect product trading in Northwest Europe. A premium is applied to account for the cost of storage, handling, lifting, and (if delivered to depot) transport, in addition to the supplier’s margin – under contracted supply this premium remains fixed for the contract term.
Contracted prices are calculated on a lagged basis, such as a one- or two-day lag i.e. the settlement price one/two days prior to delivery, or a weekly lag i.e. an average of the previous week’s settlement prices (this is usually based on a Monday to Friday average, although some suppliers use Friday to Thursday in order to issue prices before the weekend). Suppliers may also offer two- or three-week lags, a reflection of extended supply chains following the removal of Russian product from the supply pool following its invasion of Ukraine.
Buying on a lagged price levels out the peaks and troughs of the intraday market (the trading and resultant price movements within a single day), negating the requirement to monitor live pricing, and reducing administration, as there is no need to contact several suppliers to obtain quotes.
However, for distributors it is important to ensure the lag you buy on ties in with your sale price. For example, if you are buying on a two-week lag, this could significantly differ from the daily market rate at the time of delivery (and subsequently, the time of sale).
The following charts demonstrate this, comparing wholesale prices calculated on various lagged periods for the past 12 months.
Budgetary certainty
Alternatively, suppliers may offer a wholly fixed (hedged) price, whereby the total cost per litre is fixed for the contract period, rather than just the premium (this can also be done independently of the agreement with the supplier, by means of a transactional hedge with an alternative provider).
A fixed price is agreed based on the forward market at the time of agreement, with the volume and period nominated up front. This provides budgetary certainty, as the full price is guaranteed throughout the contract term, however it means the buying price becomes dislocated from the live market.
A fixed price mechanism should not be used to try to ‘beat the market’ i.e. fixing with the expectation that the daily market will rise, as it also possible the market will fall below the fixed price, leading you to pay significantly more for your fuel than you would have on an index-linked rate. Fixed pricing should only be used in circumstances where locking in the cost can be beneficial for the customer – one example of this may be a short-term fix offered to a farm for the harvest period, which allows the farm to budget their fuel costs in advance.
Prioritised supply. Guaranteed premiums
In addition to a guaranteed premium, there are other benefits of purchasing within a contract framework – in the event of a supply shortage (refinery outage, supply chain disruption etc.) fuel suppliers will prioritise contract customers, ensuring product is still made available. Supply shortages can also impact spot pricing, as other suppliers respond to increased demand, however as premiums are fixed under contracted supply, contract customers are unaffected.
Reduced flexibility. Resource intensive
The trade-off for these benefits is reduced flexibility – whilst the supplier makes a commitment to ensure product is made available, the distributor is also committed to lift its agreed nomination. In the event that customer demand is low, this may result in excess stock (requiring additional storage) or financial penalties if you are unable to meet the minimum volume requirement.
It also limits the distributor’s ability to respond to sudden drops in the intraday market, as they are committed to buying on the settlement price. Contracting large volumes with a single supplier may also lead to limitations on payment terms, depending on the creditworthiness of the distributor.
Finally, distributors must consider the administrative burden of an annual/bi-annual tender process, which can be a time consuming and resource intensive process – due to the frequently changing nature of the UK downstream supply landscape, awarded supply may change hands through each contract cycle, requiring set up process and legal review every 12-24 months, which incur associated costs outside of the actual purchase of fuel.
Spot Purchasing
Purchasing on the spot market means buying product ad-hoc as required, with no obligation to use any one supplier.
Spot buyers typically have credit lines with a number of different suppliers, contacting them for a quote when volume is required and awarding supply to the most competitive bidder. Pricing for spot purchases is based on the live market price at the time of purchase, which accounts for the difference between the previous day’s settlement price and intraday movements based on trading on the Intercontinental Exchange (ICE) – as a result, prices change minute-by-minute.
Increased flexibility and improved credit terms
The primary benefit of spot purchasing is increased flexibility – companies can react to changing market conditions and adapt their purchasing strategy accordingly, which is particularly valuable in a volatile market. For example, spot buyers may track intraday movements in price using a live market monitoring tool, aiming to take advantage of sudden price dips.
Worked example: Financial impact of price volatility
Over the period Sep-24 to Aug-25, the average difference between the high and low point of intraday wholesale trading (an indicator of volatility) was 1.21 pence per litre (ppl) for diesel and 1.16 ppl for kerosene.
Annual average differential: On a full load diesel delivery of 36,000 litres, this equates to an average cost difference of £436 per load between buying at the high vs low point of the day – for kerosene (38,000 litres) it equates to £441 per load.
Widest daily differential: The widest daily range was 6.80 ppl for diesel and 6.90 ppl for kerosene on 23rd June 2025, as oil prices fell more than 7% after Iran refrained from disrupting oil supplies through the Strait of Hormuz, a critical global chokepoint for oil and gas supply, despite threatening action in retaliation for US attacks on its nuclear facilities.
The following chart shows the difference between the intraday high and low spot price against the eventual settlement price, which indicates the range of difference vs buying on a daily price. Note, this is based on intraday wholesale price movement only and does not account for supply premium.
If prices are higher (and the buyer has sufficient stock in storage to service customer demand), there is no obligation to purchase fuel in any given week, unlike a contracted agreement which may include a stipulated weekly volume nomination. Minimum purchase commitments do not affect spot buyers, meaning ‘take or pay’ scenarios can be avoided, and distributors can easily manage both stock and cash flow based on current demand, avoiding the risk of excess stock during a demand downturn.
Equally, should additional customers be brought on, additional volume can easily be sourced to meet demand, made more difficult in contracted purchasing where volume is nominated at the start of the agreement.
Additionally, as the buyer is not locked into a contract and dependent on any single supplier, supply can be diversified across multiple options. This can result in extended payment terms – if the distributor’s total volume requirement is spread across a greater number of suppliers, the credit utilisation with each supplier will be reduced, enabling the distributor to seek increased terms.
Having multiple supply options can also mitigate against supply disruptions or shortages – if one supplier stocks out, spot buyers will already have existing relationships (and credit lines) in place with alternatives, allowing them to easily source elsewhere.
Price uncertainty, lack of supply security and resource intense
However, flexibility comes with a lack of price certainty, as spot pricing does not necessary consistently track the wholesale market. Published settlement prices are based on trading in Northwest Europe, therefore they do not account for domestic UK supply issues – for example, if supply is tight in the UK market due to a refinery outage (or closure), spot pricing may be significantly higher than the published market price.
A UK supply disruption may also impact product availability – as mentioned, in the event of a shortage contract customers will be serviced first, meaning spot volume may be unavailable.
Spot purchasing is also more resource intensive on a day-to-day basis compared to contract purchasing. Buying on spot involves contacting multiple suppliers for quotes to achieve the most competitive price – when market monitoring, it can be time consuming (and ultimately futile in a rising market) trying to find the right moment to buy, therefore potential cost benefits should be weighed against time and resource requirements.
Irregularity in purchasing can also lead to unpredictable cash flows, as weekly volumes vary more than contract purchasing which is usually lifted rateably.
Summary
In summary, there are benefits and drawbacks to both strategies, with the main trade off being price and supply security against the flexibility to respond to live developments in the market.
Ultimately, the right strategy depends on your business – risk appetite, cash flow and credit, storage capacity, resource and, most importantly, ensuring your purchase mechanism works for the customers you serve, are all factors to be considered when reviewing your approach to fuel procurement.
Oli Nightingale-Smith is a consultant with Portland Analytics – a specialist provider of fuel consultancy services across the UK, Europe and North America. With over 100 years of combined experience in the fuel industry, Portland offers an extensive knowledge base for fuel-related questions or challenges.
Image credit: iStock
