Coventry companies which purchase large quantities of fuel are being advised to review their purchasing strategies after average UK fuel prices hit the £1.30 per litre for the first time ever (according to data issued by the AA 1st March 2011). 

Many existing fuel hedge contracts are set up for users with annual consumption of a minimum of hundreds of thousands litres of fuel each month. 

However, Peter Horsley, a treasury partner at Yorkshire Bank's Financial Solutions Centre in Coventry, said UK businesses that use even 50,000 litres a month should look at the security hedging provides. 

Peter, who works at the Coventry FSC at the Ricoh Arena, said: "Now is a good time for businesses to review their fuel purchasing strategy and budgets given the day-to-day price changes. SMEs in particular can take advantage of this solution by committing to hedging smaller quantities of fuel than have traditionally been possible. Businesses can take out contracts with a minimum length of six months with a fuel consumption of 50,000 litres per month hedged. 

"The obvious advantages for these fuel hedging strategies are the benefits of taking the guess work out of budgeting and relieving worries about possible sharp increases in fuel prices affecting cash flow. For businesses where fuel is a significant proportion of costs any increase in price could have a highly detrimental effect on its profit margin." 

The risk with fuel hedging is that there is the possibility that fuel prices could drop below the pre-arranged price set out in the contract, but with many market commentators believing that prices are on an upward trajectory, treasury specialists at Yorkshire Bank believe it is an opportune moment for businesses to look at the options open to them. 

The hedged fuel prices relate to the daily rates quoted by the Platt's index, which is a source of benchmark price assessments for commodities like fuel and metal. This hedged price is agreed at the start of the partnership between the company and the bank and will not deviate with any changes in the market price over the term of the contract.

Peter concludes: "The reason fuel is such a volatile commodity is due to the exceptional economic circumstances the world finds itself in today. The raw material price is dependent on supply as well as the recovery of a number of high consumption countries. 

"The raw material price is set in US dollars which can add an additional element of volatility as the UK prices in sterling. These effects combined with the restoration of VAT to 20% and increased duty explains why fuel prices are so high in the UK. 

"Ultimately SMEs could stabilise their fuel purchases and be in a more secure position to manage their business."