 Record prices show no signs of stopping
May 19th 2008
WARNING: It is essential that anyone considering implementing any of the principles contained herein has first implemented an approved risk management policy and a robust risk measurement and control process.
Since our last issue of Do’s & Don’ts, prices have increased another 20% with the most notable increase being in the summer months, which have failed to see the generally expected softening of prices.
This market now has a look and feel of the market we saw between Feb 2005 and Jul 2005 when prices surged 90% in approximately 5 months. For the last month during this period the price rises were severe but based on little volume. Then one day in July prices collapsed 14% in a single trading session. The current market has risen over 50% in 6 months.
The reason for the collapse in 2005 was that in a market with a sustained price rise, most traders and speculators have to be long in the market. If they are long the market profits and bonuses start to accumulate. In July 2005 those bonuses were crystallised and it is possible that a similar phenomenon could be seen this year.
However for this to happen the spot price will need to fall. One reason why it is not falling is that we suspect the majority of large consumers with a flexible procurement contract have not fixed the summer period. This creates a high degree of spot market inelasticity as the short term consumers will consume at almost any price. This circle will only be solved if additional marginal physical supply is sold forward in the UK market, such as marginal LNG cargoes.
For the upcoming period our do's and don'ts for consideration can be summarised as:
DO…
- Review your portfolio. If you are not fully fixed for the next three years by now there is an issue with the way your organisation procures energy. You need to change this.
- Stop wishing for price falls. Take decisive action to participate in them if they happen but structure your portfolio in case they don’t.
- Critically appraise your energy procurement process. You should be 25% ahead of the current market
DON’T
- Keep assuming prices will fall and therefore do nothing. Problems need to managed and energy is no exception.
- Blame the markets, suppliers or traders in the market. It’s a game; they are just playing it better. Its time to raise your game and not complain about theirs.
More articles from Encore Internation: | 
