What’s the Need for a Well Thought-out Energy Risk Management Strategy?

A company that produces or consumes energy commodities such as natural gas and crude oil, and refined petroleum products like gasoline, diesel fuel, jet fuel, fuel oil, etc., should have an efficient energy risk management strategy. The purpose of a risk management strategy serves is to mitigate price risk and help limit the cost of wasted opportunity. Today’s write-up is about energy risk management and its importance for a company that produces or consumes large quantities of crude oil, natural gas, or petroleum products.

Significance of Managing Energy Price Volatility

There is hardly any energy commodities trader, investor, consumer, or producer who is not aware of the volatility in prices in the energy commodity markets. The energy markets have witnessed oil prices rising from nominally $16 per barrel to above $147 and thereafter swaying inside the range of $26 and $114. During the last decade, natural gas prices dropped from historic highs to 16-year lows. Seeing this, organizations have awakened to the fact that to stay competitive they should manage the cost of energy and the risks involved by hedging. This includes managing price risk along with opportunity cost. A hedge that does not work can sometimes be better than no hedge at all. That being so, it is significant to establish a well-balanced plan and energy risk management program that is able to meet a company’s goals and risk appetite.

Need To Set Up a Well Balanced-Risk Management Plan & Hedging Strategy

Setting up a strong hedging program is good for managing and mitigating risk. However, you should factor in the costs that come with such a program. The costs accrue as either a financial of opportunity cost. For instance, a consumer who locks-in fuel prices too soon when the market is in a downward trend is unsuccessful in exploiting the opportunity to buy fuel at a reduced rate. If choosing to buy call options at a premium cost, although the hedge cans are more expensive, a company can benefit from the opportunity to buy fuel at a reduced rate. Still, all this relies on a well-balanced risk management plan and hedging strategy.

Need To Seek Expert Assistance

Getting assistance and advice from a professional energy hedging and risk management services provider, such as Kase and Company, Inc., can be a step in the right direction. They can come up with strategies to mitigate risks in the energy markets that fit your company’s goals and risk appetite. Kase is experienced and can help with the development of a comprehensive risk management strategy that will feature: the creation of a formal goal statement, decision models, and offsetting risks versus rewards, etc. The expert price energy risk management plans will stem from a statistical approach after analysis of historical data and information about the goals of your unique energy hedging program.

Conclusion

In conclusion, setting up of a well-balanced energy price risk management strategy that depends on statistically analyzed data allows energy consumers and producers to make informed hedging decisions that are able to meet their objectives and risk appetite. Hence, using the services of a proficient energy risk management advisory firm is a good idea for keeping your company profitable by managing energy price risks.