How varying temperatures wreak havoc on margins – how to take back control

I often get asked, why does temperature really matter so much? Like all liquids, when refined fuels cool, they condense and occupy less space, and conversely, when fuels warm, they expand and occupy more space. If you are buying or selling fuel based on gross volume – it’s actual volume at the current temperature – you need to understand how the temperature affects the value of each of those gallons.

After all, the ultimate value of a fuel is based on the power it provides to an engine, which is driven by the fuel’s mass. Think of mass as the number of molecules in a given amount of fuel regardless of the amount of space that fuel takes up. One gallon of gasoline at 40°F has 1.4 percent greater mass, 1.4 percent more molecules and 1.4 percent more ability to power an engine than one gallon of gasoline at 60°F.

Historically, sales in the bulk market are measured and priced in net gallons. Northern states have typically required the use of gross gallons in transactions for tax reporting reasons.

This leaves wholesalers in those states in a tough position: They purchase gallons in the bulk market based on net gallons and sell in the wholesale market based on gross gallons. Depending on the temperature, the number of gross gallons of fuel they sell may be less than or greater than the number of net gallons of that same fuel when they buy it.

For many decades, buyers and sellers routinely concluded that when the weather changed and their margins grew or narrowed, it was an unavoidable cost of doing business.

Some businesses began to try to compensate for seasonal temperature variations by adjusting their price differentials throughout the year to account for the changing density of  the fuel they sold. But this was only a rough improvement, and didn’t reflect day-to-day temperature fluctuations.

Buyers and sellers have been using a variety of different methods to try and deal with the net-versus-gross problem, but no matter the method, buyers and sellers have lacked an industry-wide, accurate solution.

After decades of complicated formulas and imprecise approaches to calculate temperature corrections, DTN now offers modern technology that enables straight-forward access to the most objective, real-time temperature data available, right from the terminal.

Real-time information is critical to accurately account for temperature correction and take back control of your margins. When counter-parties are equipped with that data, they will be able to rely on solutions that aggregate the gross and net volumes at the terminal level.  To find out more about the new DTN Temperature Control Index product and how it leverages real-time information from terminals to offer the most accurate data possible, click here.