What this Winter Taught Us about Hedging

Written on: June 7, 2026 by Phillip J. Baratz

And What to do Before Next Winter

If you’re reading this, you’ve survived one of the more “character-building” Winters we’ve had in a while. Prices spiked, sold off and then spiked even more. Weather models whipsawed. Basis did what basis always seems to do: It behaved “normally” right up until the moment it didn’t.

The good news is that buried inside the chaos were some very clear lessons. If we take them seriously now, we can be in a much stronger position heading into next Winter.

Lesson 1: Volatility is not a bug, it’s the business
Every year we say, “This Winter was unusual.” At some point we have to admit that “unusual” is now the norm.

Flat price moved more in weeks—and sometimes even in one trading session—than it used to in entire seasons.
Basis blew out in places where people thought they were “safe.”
Dealers who were lightly hedged ended up making big money on some days and holding their breath on others.

The first takeaway is simple: hoping for a quiet Winter is not a hedge strategy. Volatility is the environment we operate in. Your hedge program must assume big moves will happen, even if we don’t know exactly when or why.

Lesson 2: Basis at the rack is not a mystery—or fate
One of the most painful parts of this Winter was the basis blowout at the racks. People saw differentials to the Mercer International, Inc. (aka, Merc) and NY Harbor widen by eye-watering amounts and felt like there was nothing they could do about it. That’s only half true.

You can’t stop basis from moving, but you can:

Know what “normal” looks like at your rack versus Harbor.
Recognize when the rack is trading rich or cheap to its own history.
Decide whether you want to wear that basis risk or push more of your hedge effort toward the paper side.

Too many dealers still treat rack basis as a kind of weather report: “it is what it is.” In reality, basis is just the local price of logistics and imbalance. If you’re consistently buying in a location that blows out every time things get tight, that’s a structural issue, not bad luck.

Going into next Winter, every company should:

Track its location basis (rack vs. Merc) over time, not just look at today’s price.
Understand whether it is structurally exposed to a chronic basis-rich rack.
Be willing, where possible, to change how it sources or to lean more on paper when basis is screaming.

You can’t hedge away basis completely, but you can stop being surprised.

Lesson 3: Inventory is a position—treat it that way
One of the more dramatic opportunities this year came when the forward curve flipped, and replacement inventory for 60 days out was trading more than 50¢ under nearby values.

To be clear, there was a window where you could empty out your wet inventory and lock in replacement inventory at a 50¢+ discount for delivery in about two months. That is not a theoretical strategy. That was real money.

However, you only see that opportunity if you’re looking at your tanks as a hedgeable position, not just “stuff we need to keep full.” When the curve is inverted like that, holding a lot of physical becomes expensive relative to paper or deferred barrels. When the curve is steeply contangoed, the opposite is true.

Going into next Winter, every dealer should have a very basic playbook:

Under what conditions do we run inventory down and buy forward?
Under what conditions do we carry a little more physical and be lighter on paper?

If your only inventory rule is “keep it full and hope,” you’re leaving money on the table when these big structure trades show up.

Lesson 4: Cold Winters quietly change your hedge book
Here’s a subtle one that matters a lot: When it’s colder than normal, your customers over-pull against whatever plan you had in mind in September.

If you’ve sold fixed or capped gallons, you’ve probably structured your hedges around some assumed burn:

“Joe will use 600 gallons this Winter.”
“Mary will use 800.”
“The whole book will be X hundred thousand gallons.”

The reality is, during and after a genuinely cold Winter, many of your customers have already burned more than that planned volume. That has two important implications:

1. On a customer-by-customer basis, a lot of the most price-sensitive gallons are already delivered.
2. On an aggregate basis, your company may now be net-long paper relative to the gallons still left to deliver.

In other words, you might have longer calls or swaps than you think. If you don’t sit down and reconcile “what’s left to deliver” versus “what paper is still on the books,” every month, you can easily walk into carrying a speculative long position when you thought you were hedged exactly.

Lesson 5: Your “leftover” hedges are not leftovers—they’re an asset
Once you’ve done that reconciliation, you may discover something interesting:

The remaining customer obligations are relatively modest.
You still hold a meaningful amount of calls or swaps that are deep in the money.

At that point, you essentially have two broad choices:

1. Convert the paper to cash.
* Close out some or all of the long calls or swaps, crystallize the gain and use that cash to shore up the balance sheet, pre-buy inventory, pay down debt or invest in the business.

2. Use the paper as “deep in the money” protection.
* Keep the hedges in place and treat them as a cushion that allows you to sell prompt gallons at very strong margins for a while.
* You’re effectively delivering gallons “off” that in-the-money paper position, capturing both the rack/retail margin and the hedge value.

Either way, the key point is: don’t ignore the hedge book just because the calendar says “March.” After a cold Winter, you have to deliberately decide what to do with what’s left. Leaving deep-in-the-money positions drifting along without a plan is the opposite of risk management.

Looking ahead
What should we be doing now for next Winter? Here are a few practical steps to take while the season is still fresh in your mind:

1. Do a post-mortem on your hedge book.

How closely did actual gallons track your assumed plan?
Where were you over-hedged or under-hedged?
How did your margins behave on the coldest weeks versus the warm weeks?

2. Get serious about basis and location.

Map out your key racks and their historical basis behavior versus the Merc and NY Harbor.
Decide where you’re comfortable being exposed and where you want to lean harder on paper or alternate supply.
Treat basis blowouts as something to study and prepare for, not just swear about.

3. Rethink the role of inventory in your strategy.

Write down the conditions under which you’d be willing to draw tanks down and buy forward if we see a 50¢-type opportunity again.
Decide who has the authority to pull that trigger and how fast you can move.

4. Tighten your process around fixed and capped programs.

Make sure your systems can quickly show you:
– Gallons promised vs. gallons delivered.
– Hedge position vs. remaining obligation.
Build in at least one formal mid-season review, not just a “set it and forget it” approach.

5. Plan your communication.

When things get crazy, the companies that do best are usually the ones that explain clearly to customers what fixed and capped programs can and can’t do, and that stay disciplined internally instead of improvising on the fly.

We can’t control the weather, the Fed, geopolitical shocks or refinery issues. What we can control is how seriously we treat our hedge book, our inventory, our basis exposure and our forward planning.

This Winter punished the lazy strategies and rewarded those who were willing to look at their positions a little more creatively—whether that meant turning tanks into a trade, turning “leftover” calls into cash or margin, or finally getting honest about what their rack basis does in a crunch. Next Winter will be different in details, but the core lesson will be the same: Volatility is where disciplined hedgers earn their keep. ICM