By Steve Atkins – Head of Global Trades, Consultus International Group
Choosing how and when to purchase your energy needs is fraught with difficulties, largely due to the volatility of the wholesale energy markets. We look now at some of the common mistakes that customers can make in buying their requirements and ask, “Are you asking the right questions?”
“Are prices at the bottom/ top of the market?”
At any given time, it is impossible to say whether prices have reached either the bottom, or indeed the top, of the market; as such it should not be relied upon to inform your decision-making priorities. Successful Risk Managers appreciate that calling the peak or floor is often a matter of luck, rather than a coherent strategy.
Instead, try asking whether the market is now offering an acceptably low position, or what would you do if prices continue to trend higher?
Ideally, adopt a risk management strategy to react as and when market trends change.
“My opinion is…”
Customers often have a strong opinion as to the future development of prices. Whilst usually based on the best information available at the time, the market carries no guarantee that it will conform to what you think is going to happen.
In this case, the correct question to ask is “what happens if the market does not behave how I believe it will? What will be our course of action?” The answer to these questions should be defined and agreed internally, with appropriate risk mitigation strategies used to define your approach.
“Prices are going up; we are going to wait until they begin falling…”
Whilst it’s certainly true that wholesale market prices are not linear and cannot go up forever, avoiding making a decision may only lead to trouble further down the road. If prices continue to rise, the decision as to when to get out of the market and buy your energy becomes an even greater one; and what happens if the long-awaited downturn does not materialise?
The reality is that not choosing to buy your energy today, for whatever reason, is actually a decision in its own right. Simply ignoring the need to buy can lead to further questioning and greater accountability further down the line.
“I can’t afford to hedge now…”
Perhaps the correct way to approach this is to consider an alternative and much more difficult proposition such as “if you can’t afford to hedge now, what happens if prices continue to go up?” A common mistake often made is for decision making around energy purchases to be deferred, be that for commercial reasons or because those with delegated authority are just too busy to weigh up their options right now, leading to delays.
It must be recognised that deferring a decision is – in itself – a decision. It is a decision to allow the market to continue to fluctuate, be that for better or worse. Deferring a purchasing decision, therefore, also requires careful consideration.
For advice on the current market, or to discuss Consultus’ range of hedging strategies please contact your Consultant or a member of our Sales Team who will be more than happy to help, on 0330 221 1000.