Minimise risks in the energy sector
Protect your business against price changes
Several techniques and financial instruments provide protection against unfavourable oil price movements. They are all examples of hedging. Hedging is a complex matter, but the general principle is simple: you want to cover yourself against possible price risks by locking in the oil price to prevent oil price fluctuations from affecting your earnings.
Hedge against oil price risks by exchanging cash flows
An oil swap is a solution to lock in at a fixed price. The oil price is established by supply and demand.
It is in the interest of both producers and consumers to hedge themselves against potential price fluctuations.
In the transport sector fuel costs constitute a large share of a company’s total costs. A carrier that foresees a further rise in oil prices can, for example, agree a fixed price for a
pre-agreed period, exchanging the variable oil price for a fixed price. An officially recognised index, such as the Platts European Market Scan, is used as a benchmark. The fixed price is a so-called ‘bare price for the commodity’, which is exclusive of VAT, excise duties and delivery charges.
The carrier is therefore always ensured of a fixed price, even if the index were to rise or fall unexpectedly. This fixed price is periodically settled retrospectively against the average price of the agreed index. If at the settlement date, the average price of the agreed index is lower than the fixed priced agreed on, the carrier will pay us the difference between the floating price and the agreed fixed price. If the average price is higher, we will pay the carrier the difference.
Oil prices are quoted in USD. We can also offer the fixed price in EUR, in which case the EUR/USD exchange rate risk your company may suffer is hedged.
Prices for oil and oil derivatives may vary by port, region, hub, delivery terms and quality. We know the market and would be happy to advise you.
Protect your business against price changes
Several techniques and financial instruments allow you to protect yourself against an unfavourable evolution in commodity prices. They are all examples of ‘hedging’. Hedging is a complex matter, but the general principle is simple: you want to cover yourself against possible price risks by locking in the commodity price at maturity, so as to prevent commodity price fluctuations from affecting your earnings.
The number and variety of hedging possibilities are practically limitless. The most common instruments are commodity forwards, swaps and options.
Keep the cost of your purchases under control
A commodity forward is a type of financial contract, in which two parties agree to sell/buy a set volume of commodities at a fixed price at a specified date in the future. At the settlement date, the buyer pays the agreed price to the seller, regardless of how the commodity’s market price has developed in the meantime.
You can buy or sell in the forwards market to lock in the price of a commodity, which you will then sell or buy later in the physical market. Possible losses in the forward market are offset by the higher or lower price in the physical market.
You can also use forwards to secure an acceptable margin between the purchase cost of raw materials and the selling price of your products.
A forward is a contract tailored to the specific needs of a counterparty in terms of timing and volumes. Such contracts are also referred to as ‘OTC (over the counter) contracts’.
Hedge against commodity price risks by exchanging cash flows
The commodity swap is one of the most popular hedging instruments to lock in a fixed price for a given commodity (e.g. gold, silver, nickel, copper, wheat or coffee).
Commodity users agree a fixed price with the bank over a specified period. If, at the settlement date, the physical market price is lower than the price agreed on, the user pays the hedge provider (i.e. the bank) the difference between the floating price and the agreed price. If the floating price is higher, the user receives the difference from the bank.
The net result is that the price the user pays for the commodity is fixed, no matter what happens in the marketplace.