Getting pricing right is a crucial function in the US refined fuels market whether a buyer or supplier, yet many in the industry are frustrated by its dynamics. This paper discusses the important features embroiled within wholesale refined fuels pricing, with the spot market the most significant factor in determining rack prices. There is a definitive correlation between spot and rack prices, and in order to better anticipate next-day moves it is imperative that marketers fully understand this relationship.

1. How spot markets influence
rack prices
Executive summary
Getting pricing right is a crucial function in the US
refined fuels market whether a buyer or supplier, yet
many in the industry are frustrated by its dynamics.
This paper discusses the important features embroiled
within wholesale refined fuels pricing, with the spot
market the most significant factor in determining rack
prices. There is a definitive correlation between spot
and rack prices, and in order to better anticipate next-
day moves it is imperative that marketers fully
understand this relationship.
By Brian L. Milne

2. How spot markets influence rack prices Page 2
Refined fuels have a long supply chain that begins when oil is first discovered and extracted,
to refining, transport, storage and final distribution to retail outlets.
Each leg is critical in the conversion of crude oil from a raw material to a finished, usable
product, which adds costs along each stage of the supply chain. These multiple stages also
expose the product to potential disruptions that can and do affect costs. The various stages
along the supply chain can also cloud our understanding of how refined fuels are priced and
can cause confusion for marketers.
A spot price, sometimes called a cash price, represents the real-time value of a particular
product with fungible characteristics. All commodities have a spot or cash price. For refined
fuels, it’s the price received or paid when ownership of fuel is transferred in the bulk
wholesale market – from refinery gate to terminal. It is the primary wholesale market, with
spot price assessments regional, based on established pipeline cycles and prompt barge
deliveries.
Spot oil product values are bid (the buyer’s price) and offered (the seller’s price) at a discount
or premium to a benchmarked futures contract. It is these market mechanisms that determine
the real-time fair value for gasoline, diesel fuel, jet fuel and heating oil in the spot market.
Spot prices are the primary driver in setting wholesale terminal prices, known as rack
postings, which are offers by suppliers for their product.
Introduction
What is spot
pricing?

3. How spot markets influence rack prices Page 3
A rack posting is the supplier’s asking price for fuel at a distribution terminal. Suppliers set
posting values to recover product costs in the bulk wholesale market, and to remain
competitive with other suppliers.
A rack posting reflects the buyer’s cost to procure product at the terminal known when “lifting”
supply. The name “rack” is used because fuel is loaded in a tanker truck under a rack
apparatus.
The rack market is a secondary wholesale market and the last market in front of retail.
As previously explained, spot prices represent the real-time value of a commodity. What this
means is a spot value is incorporating the various dynamics of the broad and regional
markets, including fundamental factors such as the supply-demand balance, seasonality
features including peak demand, RVP changes for gasoline and refinery maintenance, and
geopolitical issues.
As such, a supplier looks to a spot price as identifying these market features and then sets a
posting value aimed at recovering real costs and to establish a profit margin.
A supplier would also need to consider competition among other suppliers at the terminal in
setting its posting, as well as the supply-demand balance at the terminal and locally. Yet, by
working off a spot assessment, a supplier has already identified fair market value for the
product, reducing the risk he or she would price product at the terminal below costs. In other
words, by using a spot assessment in determining a rack posting, a supplier is less likely to
incur a loss.
Our three-part chart below offers an example of how closely rack prices align with spot
values, with the middle histogram showing the same day difference between a spot
assessment and rack price. The bottom histogram plots the difference between the typical
same day spot-to-rack differential and that differential if the rack posting was established
knowing a day ahead of time what assessment the spot value would hold. In other words, by
employing a one-day time lag, we illustrate what a rack posting would be if determined
alongside the spot assessment.
The difference between these two variables demonstrates the closeness in which rack
postings are influenced by spot markets.
What are rack
postings?
How spot
markets
influence
rack prices

4. How spot markets influence rack prices Page 4
Since the spot market for refined fuels is indexed against the futures market, why not simply
use the futures market?
In the United States, physically traded refined fuels in the spot market are indexed against
New York Mercantile Exchange RBOB and ULSD futures, with monthly contracts for the two
commodities listed out for 18 to 24 months. The financially traded contracts are fungible, and
their terms do allow for physical delivery.
However, spot assessments are for prompt delivered physical products whereas a futures
contract is for delivery a month or more into the future, creating a timing discrepancy. Spot
assessments are also regional while a futures contract would reflect national and global
influences. Moreover, the futures market includes speculation that might increase or
decrease its value more than what the physical market would otherwise warrant.
Since spot price assessments trade in a differential to the futures contract; i.e. premium,
parity or discount, national and global issues are incorporated in its value while the
differential fine tunes the price to regional issues.
In other words, a well-supplied regional market might trade at a discount to the futures market
while a tight market might trade at a premium. As a supplier, in the first market you would
likely lose business at the rack if you only followed futures prices because you’ve overpriced
your product, while in the latter scenario you’re likely headed for a loss. Most of the time
however, whether buyer or seller you would simply leave money on the table.
Although many factors can and do influence rack prices, they are most closely correlated with
the spot market. By understanding the influences in the spot market and following the price,
marketers can better understand their position in the market, anticipate next-day moves and
make profitable decisions.
Figure 1
The chart plots the spot
price for CBOB gasoline
in the Chicago market
with the rack price for E10
gasoline in Cleveland,
highlighting the close
correlation between the
refined fuels in the
regional primary and local
secondary markets.
Conclusion
Why not use
the futures
market?

5. How spot markets influence rack prices Page 5
©2014SchneiderElectric.Allrightsreserved.
About the author
Brian L. Milne is an Energy Editor, Product Manager, with Schneider Electric's Cloud
Services. Milne manages the refined fuel’s editorial content, spot price discovery activity
and cash market analysis for Schneider Electric’s energy segment. He is also the editor for
OilSpot, a weekly newsletter for fuel marketers, buyers and sellers published by Schneider
Electric. Milne has 18 years’ experience in the energy industry as an analyst, journalist and
editor, serving as Managing Editor for Btu publications and journalist with Bridge Information
Systems America before joining DTN in 1999. His industry and market focus include natural
gas, NGLs, electricity during its move to deregulated markets in the late 1990s, biofuels, and
the downstream petroleum industry. Milne graduated Magna Cum Laude from Monmouth
University in New Jersey with a B.A. in History and an Interdisciplinary in Political Science.