Protecting your business in a volatile energy market

How organisations can minimise risks from an uncertain, volatile energy market caused by the Covid-19 pandemic, but also maximise opportunities.

By Rolf-Helge Sørensen, Head of Risk and Trading, EMEA, World Kinect Energy Services.

Without a doubt, the Covid-19 outbreak has spread uncertainty across the globe, significantly impacting operations on a global scale, and the energy market is no exception. Energy prices have been hit hard, with a slump in demand for fuel, in particular coal.

What has become clear is that businesses have realised the need to ensure they are protected against sudden fluctuations in the energy market. Global crises such as the pandemic are extreme and infrequent, however, energy markets are often exposed to turbulent market conditions. Systems should always be in place to ensure energy supply and prices are protected for the long-term.

Strategic thinking

The energy market can be a minefield when you are unsure of where the market is heading. With energy producers reducing production or shutting down altogether, it can be difficult to predict prices and increased volatility and uncertainty of the market direction often occurs as a result.

To minimize risks, businesses should have an efficient, robust risk management strategy in place to help combat price fluctuation, safeguard supply, and help become more resilient to market changes. Every business and sector will have its own price risk tolerance, so a strategy needs to be tailored to an organisation’s individual needs.

A good strategy, used alongside in-depth market insight and daily monitoring, will help mitigate volatility, enable users to manage budgets more effectively, help protect margins, minimise price swings, as well as enable organisations to stay competitive.

Future-proofing energy procurement

While global crises, such as the Covid-19 pandemic are rare, being prepared and proactive in your approach to energy procurement will help mitigate risks and protect your business from any unexpected fluctuations in the market that often lead to restrictions and impact energy output and demand.

Volatility in the market, however, can also present opportunities, so consider how to add value to your business, such as taking advantage of lower energy prices.

Review contract terms

Ensuring you regularly review your energy portfolio is crucial. Being ahead of the game can reduce any potential risks. It is worth exploring if your current contract gives you the option to extend, capture and lock in historically low prices or request a longer hedging horizon should the market dynamics change.

Be aware of your hedge position

Be flexible when it comes to your hedge position. Contract clauses are often linked to variations in demand. Consider mitigating actions such as reforecasting consumption or reducing your hedge position. However, always check the terms of your contract and consult an energy expert before embarking on any significant changes to your contract to avoid potential penalties or being forced to unwind hedges.

Understand your credit terms

Make sure you understand your payment and credit terms on your contracts, through appropriate due diligence.

There is no one-size-fits-all approach when it comes to energy price risk management strategy. Businesses and sectors will have different threats and challenges. Markets can also change daily, so it is important that organisations regularly monitor and review strategies and communicate regularly with suppliers and stakeholders to help minimize the impact of future financial or commercial risks to your business.

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