White Paper Price Volatility May 2009

WHITE PAPER
Intra-Day
Price Volatility
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A Look at the Facts and
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Potential Implications
By Laurence Cohen, Telvent DTN Product Management

www.dtn.com/refinedfuels | 1.800.391.1175

INTRA-DAY PRICE VOLATILITY
Intra-Day Price Volatility
A Look at the Facts and Potential Implications
Introduction
The term volatility is one of the most frequently used words in the
petroleum industry today. How can it be measured, and what are
the implications for decision makers in pricing and supply? In this
industry on how suppliers are coping with volatility via changes in
price effective times. This information will help buyers and suppliers
understand key market trends, and ultimately lead to more informed
purchasing and selling decisions.

Measuring volatility – how much has it increased?
Volatility increased dramatically in 2008

Figure 1 depicts a measure of volatility based on the average daily
change in the RBOB NYMEX contract. Price changes are shown on an
absolute value basis. In 2008, there was a dramatichttp://www.adobe.com/
Reader from: increase in market
volatility, to an average daily price change of 5.8 cents per gallon. By
comparison, the average daily price change in 2007 was 3.5 cents per
gallon. Thus far in 2009, the average daily price change exceeds 4 cents
per gallon, slightly below the same time period in 2008.

Figure 1
Volatility increased substantially in 2008

A measure of volatility based on the average daily change
in the RBOB NYMEX contract

© 2009 Telvent DTN. All rights reserved. www.dtn.com/refinedfuels | 1.800.391.1175
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Prices can change rapidly over the course of

a couple of hours

Given the large daily changes in prices, one of they key questions for
buyers and sellers is when and how often to make an intra-day price
or purchase decision. This challenge is significant, as the markets
can change quickly during the course of the day. Consider the daily
decision making process in the morning. For buyers, do I load early
in the morning, or do I wait to see what happens? For sellers, do I
keep my price where I set it yesterday, or should I make one or more
intra-day changes?

FIgure 2 captures the changes in the spot market during a narrow
two hour window between 10 a.m. and noon.

Figure 2
Market prices change drastically, even in a
two hour window in the morning


Change in spot prices, noon vs. 10 a.m. Central time
(absolute value) — 2008 averages

Nearly 45 percent of the time, spot prices moved less than +/-1 cpg
between 10 a.m. and noon. However, it is clear that there was often
significantly higher volatility — with the markets moving greater
than 2 cpg about 35 percent of the time. From the inset pie chart,
72 percent of the time the market continues in the same direction –
up or down — comparing 10 a.m. and noon prices. However, there
are still a significant number of days — 28 percent — when the
market at noon has moved in an opposite direction to where it was
headed at 10 a.m.

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How have suppliers coped with increased volatility?

Intra-day price changes nearly doubled in 2008 vs. 2007

In reaction to the jump in volatility in 2005, suppliers began to
sharply increase the frequency of 6 p.m. (or end of business
day) effective times, moving away from midnight effective
times. With the further jump in volatility in 2008, suppliers
began to increase the frequency of intra-day moves as well.
Figure 3 tracks the increases in intra-day price changes:

Figure 3
Intra-day price changes are increasing as
suppliers cope with higher volatility


In 2004, 6 p.m. prices (end of business day) represented only about
10 percent of all price moves, but by 2009 this increased to about 80
percent of all price moves. In 2004, only about 4 percent of all price
changes were made on an intra-day basis. By 2008, the frequency of
intra-day moves nearly tripled, to 11 percent of all moves. Compared
to 2007, intra-day moves nearly doubled in 2008.

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Figure 4 provides more detail on where the intra-day moves are

currently taking place.

Figure 4
Intra-day moves are more common in unbranded sales and in PADD 2

Intra-day moves are most prevalent in the PADD 2 (Midwest), while
intra-day moves are less common in the PADD 4 (Rocky Mountain) area.
As expected, intra-day moves represent a much greater portion of the
unbranded business (20 percent) compared to the branded business (2
percent). The unbranded intra-day changes — at 20 percent — is large
and significant. For perspective, if everyone made one intra-day change
for every end of day change, the percentage of intra-day moves would
be 50 percent. It is apparent that intra-day price moves have become a
standard practice in the unbranded sales channel.

Conclusions
Where are volatility and pricing practices headed?

We have quantified the substantial increase in market volatility,
and presented some facts on the corresponding changes in
pricing effective times and increase in intra-day prices. Forecasting
volatility for 2009 is of course difficult. However, looking at the
month-to-month variance in 2008, it is apparent that any supply
disruption or geopolitical event is likely to keep volatility high
during 2009. However, if the absolute price levels remain relatively
low, this may help to somewhat stabilize daily volatility.

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We think it is safe to predict that there will continue to be increases in

intra-day price changes, in both branded and unbranded business. The
shift to 6 p.m. pricing (from midnight) took time to fully transition, as
this required changes in the downstream supply chain processes and
systems. Similarly, the shift towards intra-day price changes requires
buyers and sellers to have much better information and systems in order
to react and execute decisions effectively. This transition appears to be
taking place and will continue to gain momentum.

We are also seeing innovative buyers and suppliers stepping away from
the pack and seeking new ways to buy and sell fuel. For example, there
has been explosive growth in transactions on the DTN Exchange, which
provides an online transactional platform where prices and volumes are
agreed to on the basis of real time market conditions.

What are some of the implications for my business?

Volatility and intra-day pricing are here to stay. Failure to recognize
these trends and adapt to the new market realities can have unintended
consequences, including:
• Reader from: http://www.adobe.com/
Loss in profitability: As a buyer, there may be better deals out in
the market that may not be apparent by only looking at rack prices
once a day. As a seller, there may be opportunities to capture
additional margin and sales by increasing frequency of intra-day
moves to reflect market conditions.

• Increased risk and hedging exposure: The dynamic nature
of spot and rack prices creates additional challenges for risk
management practices. Short term forecasts of sales and prices
become a huge challenge — and the costs associated with
hedging are not always transparent in many organizations.

• Use of misleading rack benchmarks for decision making:
Static views of rack averages and other benchmarks may not
always reflect what is going on in the market. When doing
historical analysis to study price relationships, it is important to
consider all rack and spot prices that were in effect throughout a
given day, not necessarily prices at the opening bell.

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In order to stay on top of the market and make good decisions, real

time business intelligence is needed, including:

• Accurate discovery of spot market prices: As prices change
throughout the day, it is critical to have up-to-date prices that
reflect trading activity in the major markets.

• Accurate and timely discovery of intra-day supplier rack
prices: With increased price changes throughout the day,
yesterday’s end-of-day prices often expire and cannot be used
for decision making purposes. It is essential to have up-to-date
supplier intra-day price changes as they occur.

• Calculation of key performance indicators: It is vital to have
access to current levels of performance against the backdrop of
market conditions. This includes real time terminal liftings/sales,
inventories, and margins.

In addition to having the solid business intelligence described above, it
is important for decision makers and analysts to view this information
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in an organized and consolidated way. Buyers and sellers also need to Reader version 6.0.1 or
have robust processes and systems for leveraging this information into
decisions about purchasing, supply, and pricing.

Interested in more information?
Telvent DTN continues to assist petroleum suppliers and buyers in
managing volatility. Our products and services are helping thousands
of companies in the downstream supply chain make better decisions
on pricing, purchasing, and supply. Contact your Telvent DTN sales
professional for more detailed information about new Telvent DTN tools
to optimize buying and selling petroleum products.

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White Paper Price Volatility May 2009

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White Paper Price Volatility May 2009