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This story appears in the May 25 print edition of Transport Topics.

With fuel prices dramatically lower than just a year ago, carriers that engage in hedging are questioning whether the market is close enough to a bottom to begin locking in prices, according to several fuel-purchasing analysts.

Questions from fleets are pouring in, as fuel prices creep upward in spite of high supply levels and low demand, defying traditional market patterns.

“We’re getting calls from customers asking, ‘Do I think this is the bottom? Should I start to hedge my position?’ ” said Paul Orrico, director of fuel product development for Ryder Energy Distribution Corp.

Ryder, part of Miami-based Ryder System, provides fuel-purchasing services for about 40,000 Class 8 trucks, mostly in private fleets.

Orrico declined to peg the bottom of the market.

However, Brad Simons, president of Simons Petroleum’s Pathway Network, told Transport Topics, “Our phones are ringing off the hook, too,” and, “It’s fair to say that the bottom numbers are in.”

Simons Petroleum, Oklahoma City, is a petroleum marketing company. Among other services, its Pathway division provides fuel management for trucking companies.

Hedging refers to the practice of managing fuel expenses through the purchase of der-ivative financial instruments such as options and futures contracts.

A trucking company can purchase such instruments directly on a commodities exchange. Or, a carrier can use a fuel services provider, passing responsibility for direct interaction with financial markets to a third party.

Truckload carrier Schneider National, Green Bay, Wis., hedges a portion of its diesel expenses by purchasing heat-ing oil futures contracts on the New York Mercantile Exchange.

Steve Graham, Schneider’s vice president of purchasing, said, “Now might be a low point in fuel, if you think in the context of two to three years.”

Heating oil futures contracts are sometimes used to hedge diesel risk because the two fuels are chemically similar. For this reason, the prices of the two commodities track one another fairly closely over the long term, Graham said.

The purchaser of a futures contract is obliged to take delivery of a certain commodity at a certain price and time.

A trucking company that hedges diesel by trading heating oil futures will usually settle its position in the heating oil market for cash before the delivery date.

If the price of heating oil appreciates after a trucking company purchases a futures contract, the carrier receives the difference in cash when it liquidates its position in the futures market by selling the contract.

The carrier then applies profits from the heating oil deal to buy diesel on the spot market.

If commodity prices fall, the carrier is forced to sell the futures contract for less than it cost to acquire and books a loss when it exits the market.

Schneider’s hedging activities stem from a need to control costs associated with empty miles and idling — expenses it can’t reclaim through surcharges.

Surcharges cover “about 80% to 90% of our fuel,” said Graham. However, the remaining “10% to 20% is still a big number that [Schneider] is exposed to.”

Schneider declined to quantify its fuel expenses.

Even with recent increases, prices for refined fuels and crude oil remain substantially lower than during last summer’s commodities bubble (click here for related story).

That means that carriers that hedge now would be “getting in at a better price” than they would have last year, said Bruce Gress, director of petroleum risk management for Pilot Travel Centers, Knoxville, Tenn.

Nevertheless, the fact that recent fuel price increases have occurred against a backdrop of plentiful supply and scant demand has given at least one carrier pause as it moves to set up fuel hedges.

“A lot of the traditional cues for the fuel market haven’t been playing very well lately,” said Steve Lursen, special projects director for Decker Truck Line, a Fort Dodge, Iowa, refrigerated and flatbed carrier. “There’s all kinds of supply and little demand, and yet, over the last month, we’ve seen very large increases in fuel futures.”

Earlier this month, NYMEX heating oil for June delivery hit $1.5184 a gallon, the highest level since January. On March 11, the same contract valued heating oil at $1.1331 a gallon, an indication that traders are expecting steeper spot-market prices than in the first quarter.

Despite recent increases, June heating oil on May 18 had fallen 60% from its peak last July, during the summer fuel crisis. NYMEX futures contracts are active for 18 months prior to their delivery date, according to the exchange’s Web site.

Schneider’s Graham said that regardless of short-term fluctuations in fuel markets, “now is the time to make up your mind” about purchasing strategies. “When the market starts to make a strong move, you won’t have time to be debating.”