Hedging in energy: how to manage price risks in this market?

See how to manage financial risks with energy hedging and learn about the particularities of this market.

May 23, 2024

Hedgepoint Global Markets

The market for any commodity is subject to volatility, influenced by a variety of global factors. Within this scenario, energy commodities are highly influenced by these changes, often more so than agricultural commodities.

Several characteristics become important variables in global energy market prices. Even so, risks can be managed using hedging tools.

In this blog post, Daniel Osorio, Head of Energy Americas at Hedgepoint, tells us more about these points, clarifying questions such as:

  • What are the variables that make the energy market even more volatile?
  • How to protect yourself from price volatility;
  • The importance of hedging in the energy sector.

Enjoy the read!

Energy market: understanding commodities

Energy commodities are goods that are produced and traded all over the world. They are physical products such as oil, natural gas, coal, and electricity. These raw materials are fundamental to the movement of society, providing energy for homes, businesses, and transportation.

As part of an international market, energy commodities have economic relevance and are subject to significant price fluctuations. These changes can occur due to demand and supply issues or due to climatic and political conditions.

What’s more, this market is constantly changing and growing. From 2000 to 2021, the total global energy supply increased by 47%, according to the US International Energy Agency. According to the US Energy Information Administration, the world’s largest energy producers are:

  • China;
  • United States;
  • Russia;
  • Saudi Arabia;

Read also:

Brazil: sugar market leader in 2024?

What are the main differences between hedging energy and other commodities?

Hedging tools are especially important in the energy market because the variables that can affect prices are more numerous and volatile.

To explain the issue, Daniel Osorio, Head of Energy Americas at Hedgepoint, addressed the main points that deserve attention:

Greater price volatility

According to Daniel, the energy market has more volatile prices than other commodities due to the many factors that influence it. Unlike coffee, for example, energy products are not extracted seasonally. They are sold and delivered to the market continuously, every day.

With coffee, you can get a closer idea of its value depending on the stability of the market over the months. However, with the energy market, it’s more challenging to analyze an economy that changes every 24 hours. Therefore, the price of this commodity is more susceptible to global events.

“If something impactful happens anywhere on the planet, it could change energy prices, because it’s a more volatile market,” says Daniel Osorio.

Difficulty in forecasting values

In addition to high volatility, the energy market is also unique in terms of predictability of value. As production is not done in batches, there is no way to expect an average amount of energy to be delivered to the market at any given time.

“The delivery of energy products is not linear. As a result, forecasting future values is more compromised compared to other commodities,” explains Daniel Osorio.

In the case of wheat, for example, you can always expect an average seasonal delivery, which makes forecasting more accurate. Regarding energy, it is difficult to predict the delivery quantities of oil and natural gas, as their production has no established patterns. This unpredictability makes energy hedging even more important in this segment.

Greater political influence than in other commodities

Finally, global political issues significantly influence the volatility of energy market prices. According to Hedgepoint’s Americas energy director:

“You have to pay attention to the political environment, what’s happening politically in the United States, Europe and the Middle East,” he says.

Issues that arise quickly on another continent can affect the value of oil and natural gas in Brazil. These events can start suddenly and have widespread repercussions.

“The current conflict in the Middle East, for example, encompasses highly sensitive political issues that could escalate in a matter of days. This means that the volatility of energy is constantly changing,” argues Osorio.

Read also:

Impact of the conflict in Ukraine on the commodities market after 2 years

How important is the energy hedge?

In an unstable market like the energy sector, protection against financial risks is extremely important for companies exposed to this volatility.

“Although energy market prices have stabilized in recent times, despite episodes of high prices, this doesn’t mean that volatility won’t return,” says Osorio.

At the moment, there are many situations that can affect the energy market and rapidly change the values of energy commodities. As a result, companies that depend on buying and selling products such as oil and oil products need even more in-depth knowledge. This will enable them to protect themselves from rapid price fluctuations.

With well-structured hedging tools, oil prices can be fixed, regardless of what the future holds in terms of political issues. Osorio explains:

“If you have a strategy, this is the best way to have a sustainable business. Energy hedging is about seeking protection to avoid big losses.”

With this in mind, it is essential to have support to manage commodity price risks and an experienced energy hedging team. Hedgepoint works with all these instruments and you can also find more commodity-focused content on the Hedgepoint HUB.

Start turning risks into opportunities today!

This document has been prepared by Hedgepoint Global Markets LLC and its affiliates (“HPGM”) solely for informational and instructional purposes, without the purpose of instituting obligations or commitments to third parties, nor is it intended to promote an offer, or solicitation of an offer of sale or purchase relating to any securities, commodities interests or investment products. Hedgepoint Commodities LLC (“HPC”), a wholly owned entity of HPGM, is an Introducing Broker and a registered member of the National Futures Association. The trading of commodities interests such as futures, options, and swaps involves substantial risk of loss and may not be suitable for all investors.  Past performance is not necessarily indicative of future results. Customers should rely on their own independent judgment and outside advisors before entering any transaction that is introduced by the firm. HPGM and its associates expressly disclaim any use of the information contained herein that directly or indirectly results in damages or damages of any kind. In case of questions not resolved by the first instance of customer contact ([email protected]), please contact our internal ombudsman channel ([email protected]) or 0800-878 8408/[email protected] (only for customers in Brazil).

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