Why Energy Producers & Consumers Need To Have An Effective Risk Management Strategy?

Any company that produces or consumes energy in huge volumes knows the importance of energy risk management and why they need an effective risk management strategy. The goal of energy risk management is to minimize price risk and also to avoid the cost of wasted opportunity. In this article, we will analyze why energy risk management is so important for an energy producer or consumer. Managing Energy Price Volatility Is Important Volatility in prices of energy commodities is known to all energy traders, investors, consumers, and producers. The energy markets have seen oil prices rising from nominally $16 per barrel to over $147 and then oscillating between $26 and $114. During the course of the last decade, natural gas prices fell from all-time highs to 16-year lows. Seeing this, companies have realized that to remain competitive they need to manage the cost of energy and the risks involved. This involves both managing price risk and opportunity cost. A hedge gone wrong can be more counterproductive that no hedge at all. With that said, it is important to set up a well thought out plan and energy risk management program that meets a company’s goals and risk appetite. Why Has A Well Thought Out Risk Management Plan & Hedging Strategy? Having an effective hedging program is certainly a good strategy to manage and mitigate risk; nonetheless, you should be alert about the costs that accompany such a program. The costs may come in the form of financial or opportunity cost. For example, a consumer that locks in fuel prices too early when the market is declining fails to capitalize on the opportunity to purchase fuel at a cheaper price. By buying call options at a premium cost, although the hedge can become more expensive, one can benefit from the opportunity to buy fuel at a lower cost. Even so, all this depends on a well thought out risk management plan and hedging strategy. Why Get Help From Experts? Seeking the help of the experts can be a good idea as they can offer you strategies to mitigate risks in the energy sector. Since they are veterans of the field they can help create a comprehensive risk management strategy that will include the development of a formal goal statement, decision models to help implement your moves amid intense volatility and balancing risks versus rewards, and more. Their price energy risk management plans will evolve out of a statistical approach by analyzing historical data and all information discounted on charts about what markets say about themselves. Conclusion Building an energy price risk management strategy based on statistically analyzed data enable the energy investors, consumers, and producers make confident hedging decisions.