Fuel volatility: is your business exposed?
Why fuel risk is rising now
In brief: Fuel risk is not only about crude oil prices. For many businesses, the bigger exposure sits in refined products such as diesel, gasoil and jet fuel, or in freight and supplier charges. The priority is to understand where fuel enters the cost base, how material the exposure is, and whether it is best managed through hedging, contracts or pricing mechanisms.
Global oil markets remain volatile, with near-term pricing shaped more by geopolitical supply risk than underlying demand. The escalation of conflict in the Middle East has added a material risk premium to energy prices and increased the likelihood of sharp movements in refined products.
The key issue for fuel consumers is refined product risk. Diesel, gasoil and jet fuel can rise faster than crude when crack spreads widen. Crack spreads (the price difference between crude oil and refined fuel products) reflect refinery capacity, product-specific supply and demand, logistics constraints and geopolitical risk, meaning crude oil alone is an incomplete proxy for your fuel exposure.
During oil price shocks, refined products can increase more than crude. While crack spreads are typically below approximately USD 25/bbl, the current shock has seen gasoil-crude spreads expand materially above historical norms.
The data reveals:
- Geopolitical risk is sustaining volatility across crude and refined products.
- Refined product markets remain tight, particularly diesel and jet fuel.
- Elevated crack spreads increase earnings sensitivity and basis risk.
A considered hedging strategy can help manage refined product exposure, while recognising that proxy hedges will not perfectly match physical fuel costs.
What the futures curve is telling us
The Singapore gasoil futures curve is backward-dated, with front-month prices trading materially above later-dated contracts. This indicates tight prompt supply and an expectation that conditions normalise over time.
The steep front end reflects product-level disruption rather than simply crude oil scarcity. Refinery constraints, disrupted trade flows and strong end-user demand have tightened distillate markets.
The flatter, lower back end suggests markets expect risk premia to fade as supply chains normalise and inventories rebuild.
Near-term hedging remains expensive, but the curve may provide opportunities to lock in more reasonable prices from late 2026 onward.
What this means:
How to manage fuel price exposure
While the boat may have sailed (or in this instance did not leave the strait), you can manage price volatility to your business in various ways depending on the nature of your risk profile.
Diesel
Currently there is no liquid financial derivative contract for New Zealand diesel. Any hedging framework therefore needs a proxy benchmark that tracks your diesel price closely.
Gasoil is the most practical proxy. Diesel is a finished product derived from gasoil, with additional freight, distribution, blending and regulatory costs.
Because these additional components tend to move more gradually, most diesel price volatility is driven by gasoil. A hedge should reduce, but not eliminate, fuel price risk.
Using SGO10 as a proxy hedge for diesel
SGO10 is the key Asia-Pacific gasoil benchmark. It is liquid across swaps and options and is generally tradable out to around 24 months, with longer tenors available depending on market conditions.
SGO10 is generally an appropriate benchmark for diesel and marine gas oil exposure. Before hedging, review how your physical price references market benchmarks, including lags, averaging conventions and supplier margins.
Basis risk has historically been manageable but can widen in stressed markets, particularly where refining margins, freight costs or local supply-demand dynamics move independently.
A gasoil hedge should manage the majority of directional price risk while leaving some residual basis exposure.
Jet fuel
Jet fuel and gasoil are both middle distillates and have historically been highly correlated, so SGO10 can closely track the commodity component of jet fuel.
The practical challenge is pass-through. If your exposure arises through airline or freight fuel surcharges, the surcharge may not move directly with jet fuel prices.
Before hedging indirect jet fuel exposure, understand surcharge methodologies, timing lags, smoothing mechanisms and commercial adjustments. Otherwise, a financial hedge may leave material residual basis risk.
The jet fuel-gasoil spread has historically been small and stable, supporting gasoil as a technical proxy. Hedge effectiveness depends on whether your commercial surcharge exposure actually tracks jet fuel prices.
Where fuel risk sits in your business
Where fuel risk sits in your cost base
Fuel price risk is a margin, cash flow and earnings risk that can sit across multiple parts of your cost base.
Direct fuel use is visible, but larger exposure may be embedded in freight, logistics, supplier charges or airfreight surcharges.
Because refined products can diverge from crude, your exposure should be assessed against the fuels and benchmarks that drive your actual costs.
Explore the data
A practical assessment should answer three questions:
- Where does fuel enter your cost base?
Include direct consumption and indirect exposure through freight, airfreight and supplier pricing. - How material could the impact be?
Measure potential movements against EBITDA, gross margin and cash flow, not only litres consumed or annual spend. - Can the exposure be managed?
Direct fuel may be hedgeable through a market benchmark; indirect surcharges may require commercial or contractual controls.
The data reveals
The most visible exposure is not always the most material. Direct diesel may be easy to quantify, while freight-linked exposure can be larger and harder to control.
The right response may therefore combine hedging, contract review, supplier engagement and pricing pass-through.
What this means for your business
Assess fuel risk across the full value chain, not just through direct fuel purchases.
A clear exposure view helps determine whether to hedge, renegotiate contracts, adjust pricing or build flexibility into budgets.
The objective is preparation, not price prediction.
Managing exposure: from volatility to action
What today's businesses should be looking for
Managing fuel risk starts with identifying what is material, what is hedgeable and what should be managed commercially.
Your approach should reflect exposure type, earnings sensitivity, available instruments and commercial levers.
The practical questions
A practical framework should answer four questions:
Financial hedging may be appropriate for direct exposureMinimum trade volumes are around 1,000 barrels, exposures should be grouped by month or quarter. Hedging is generally achievable out to 24 months. |
Where fuel use is direct and measurable, hedging can reduce cost volatility and improve budget certainty.
For diesel, a proxy benchmark is usually required. The benchmark should be demonstrably aligned with your physical pricing.
A fixed-for-floating swap can convert floating price exposure into a more predictable cost.
Commodity dealing lines are typically straightforward to establish where existing FX or interest rate dealing lines already exist, although additional documentation and product limits may be required.
Related FX risk management of a USD priced commodity hedge will also need to be considered. Some hedge providers also offer the ability to manage this on behalf of the buyer in converting the landed price in NZD.
Unlike FX or interest rate programmes, fuel hedging is often best aligned to the financial year and budget cycle, with hedges executed before or during annual budgeting to lock in forecast fuel costs.
Commercial management may be more effective for indirect exposure
Indirect fuel exposure is harder to hedge.
Where exposure sits in freight or airfreight surcharges, the cost may reflect supplier methodologies rather than observable market prices.
A financial hedge can create basis risk or duplicate risk already managed elsewhere in the supply chain.
Review surcharge calculations, timing lags, pass-through rights and supplier hedging arrangements before hedging.
The recommended approach
Separate fuel risk into two categories:
The new expectation
A good fuel risk strategy is a decision framework, not a price forecast.
For some businesses, the answer will be financial hedging; for others it will be contract renegotiation, freight changes or improved pricing mechanisms.
The priority is to move from reacting to volatility to preparing for it.
How PwC can help
PwC can help you quantify direct and indirect fuel exposures, test earnings sensitivity, assess basis risk and design fit-for-purpose treasury policy settings.
We can also support bank engagement, commodity dealing-line setup, hedge execution governance, and review of supplier and customer mechanisms to improve cost pass-through and budget certainty.
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