Letters of credit (L/Cs) are being employed by some US states in new laws that aim to prevent unscrupulous oil traders sellingand subsequently failing to deliver oil for heating purposesto customers who putmoney up front.

To combat the growing problem, several states are adopting a combination of stricter written contracts and requirements for dealers to secure a portion of the supply ahead of time through pre-buy deals.

Pre-buy deals

Under a bill passed by New Hampshire lawmakers, dealers would have three choices to secure the pre-buy deals.

Either they could buy futures contracts for 75 per cent of the oil, or they could obtain a surety bond for 50 per cent of the oil or they could open a L/C for 100 per cent of the oil.

Price pressures

New Hampshire oil dealers have said requiring bonds or L/Cs could boost prices as much as 12 cents per gallon, and it would be difficult for smaller dealers to stay in business.

Local media reports that many smaller dealers have not been able to raise L/Cs or bonds.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.