Crisis – what crisis?
October 1st 2008 Financial instability has forced commodity prices down both through lessened
demand and an absence of speculators.Why are energy prices still so high.
Mark Dickinson,MD, Encore International explains
The recent turmoil in the
financial markets has taken
its toll and the recessionary
fears that we expected to hit the
markets in 2009 appear to have
reached the oil markets early,however
such a correction in the global energy
economy has left many UK consumers
of Gas and Electricity wondering why
they have not so far benefitted from
equivalent falls in prices.
Why are UK gas and electricity
prices still high even though oil
prices are falling?
There are a number of possible
reasons for this some of which can
be summarised as:
The current tight power supply
prices are maintaining a high spot
electricity price which is
supporting the electricity forward
curve which in turn is supporting
the gas forward curve
We are entering the notoriously
difficult Q4 period where price
volatility can be extreme based
on the weather and the UK gas
storage situation
The UK large consumers are still
largely fully floating and exposed to
the spot market for the future and
as such provide a natural sink for
gas and electricity which has a high
degree of price inelasticity reducing
any incentive for the forward curve
to fall prior to maturity
Is now a good time to fix my
energy price?
A number of energy market advisors
seem to think it was a
good idea to recommend
that consumers fix their
prices four years forward
4 months ago, others
thought it was best to do
nothing and wait; the
reality both were
speculating with your
money.
Ultimately UK gas and
electricity are still in
excess of 15% overvalued
compared to the
underlying oil price.However, this
does not mean that this
overvaluation will be corrected, nor
does it mean that the oil price will
not fall further. In essence this
uncertainty is why the majority of
you continue to ride a roller coaster
with respect to energy procurement
which in some cases threatens the
very essence of your business. You
need to stop trying to second guess
the markets and avoid the implicit
lurching from one crisis to another
which has become an all too familiar
feature of energy procurement and
start to manage your risk.
What happens if I manage my
energy price risk?
In a world of risk management there
are no crises, only opportunity. In a
world of risk management where
you manage your energy price risk
three years forward and you can
both fix and unfix, the period of
price inflation from October 2007
has actually been a period of
opportunity. With the recent price
falls we are potentially about to
embark on another period of
opportunity.
The table below shows the real
results of 5 consumers of energy
that have been using risk
management as a process for
energy procurement for between 3
and 5 years. Look at it, study it, and
compare it to your performance; in a
market that trebled then fell by 80%
before quadrupling before falling by
30% notice the stability in the
numbers and the fact that on
average they are better than yours.
There are a number of crises in
the world but energy does not need
to be one of them, you just need to
change the way you manage it! More articles from Encore Internation: | 
