Energy prices in the UK and Europe have hit new highs this week. Looking at the situation logically, the market is functioning as it should – it’s rising due to increases in demand and decreases in supply. We have low gas supplies, a lack of wind, and the possibility of higher demand on the back of a possible cold winter.
Businesses in the market this week in need of gas or electricity are most likely to have been flushed out with market moves, and so offers in the market are rare and quickly snaffled up.
So, what should you do if you have not yet hedged?
- Don’t “talk your book” – You may want the market to fall, and you may be looking for clues on when the market could fall. Perhaps Nordstream 2 could come on early, or perhaps the Government will intervene. You can be forgiven for thinking that, at these prices, demand will fall and some industries will be constrained off. All of this could be true, but the reality is that there is a fundamental shortage of gas in storage, and the markets are pricing in extreme tightness for this Winter.
- Don’t misunderstand your risk – So often businesses think that prices cannot go any higher, or that at some point they will fall. Of course, this is at some point true, and we do think that in the long term much of the supply issues will start to abate, but it is quite feasible that this will get even worse before it gets better. To quantify this, you have to ask yourself what happens if the market moves to x? If it does, what will you do? Be disciplined in your approach, measure your risk and exposure, and then execute.
- Don’t assume that you are the only one going through this – Often we get asked what others are doing. In truth you will never know, but these prices are filtering into the prices of end product for many. Some customers are well hedged, but the hedges will only last for so long. So what everyone else is doing is not always that relevant. Imagine if you were at a casino with some friends and you all lost money. You would not go home to your partner and say “I lost lots of money but so did my friend so its ok!”.
It is a tough market, so build risk limits and stick to them. If decisions are being deferred, be in no doubt that this is in itself a decision. And make sure that when you meet to discuss markets, you have decision makers and insight at the ready, so you can act quickly in response to market moves.
