Have I got news for you?
May 25th 2006

What a couple of months it has been. Carbon prices have been up, they’ve been down, gas storage injection for June has been on and it’s been off. An alleged design fault on all north sea gas fields has been discussed to death, the offices of some of the major European super utilities were visited by the competition authorities (apparently they were not there to hand out prizes) and the National Grid produced its winter operations report. That is what I call fantastic market news flow but what did it actually mean for the energy consumer.

Well first of all it meant a lot of price volatility as we can see from the charts below. Secondly it probably resulted in the unwitting release of a few choice expletives generally starting with ‘oh’ and ending in ‘sake’. However beyond this what did you the large consumer do? What action did you take?

I’m going to guess that many of you took no action! You may have compared the market price to your budget price and said, its still too high I am going to wait a bit longer. You may have spoken to your advisor who said prices are still too high, the oil markets are not going to stay at $70, that politically the price of carbon should be 6 euros per tonne not 10 euro and not forgetting that now those dastardly European super utilities have been raided the beginning of the end of these crazy market prices is about to end.

Alternatively you may be one of those people who fixed their prices during the dip in power prices and now you are feeling comfortable that you have done the right thing as prices have gone up, but your still slightly nervous that the market will end up being this high close to maturity, the market spot price for May-06 is not too much different from the out-turn price for last year and you have just locked into a 20% premium for this winter and next summer.

Now only time will tell whether those who have taken action will be ultimately right or wrong, and I don’t envy any of you because based on the news flow and the market price information to hand, plus 3 analysts processing gigabytes of data every day from 6am until midnight, I could not have taken an effective decision.

Why couldn’t I have taken an effective decision if I was in your position? Well you have no way of viewing the market information in context, so you are left making an emotional decision based on supposition and a speculative view of how what happens in the news today may or may not effect the market in the future.

A much more effective way of dealing with the situation is to first of all understand the value and the risk of your position compared to your budget and compared to the market. Once you know this you can see how the news flow is affecting the market and you can consider the impact of this in the context of the risk that you are taking and how it is affecting the value of your position. If the news flow isn’t affecting you in any significant way, then you can confidently take a conscious decision to do nothing, if the news flow is causing prices to alter the balance of your position, you can take the appropriate action, at the appropriate time to ensure that your position remains balanced to the market. The chart below shows how a risk manager might have taken action based in the news flow for a budget year which starts in Oct-06 and ends in Sept-07.

Taking effective decisions based on the market news flow is easy if you have a controlled process to place decision in the context of what it means to your business. If you don’t have this you really have to question why you read the news at all?

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