Fuel price risk management, a specialization of both
financial risk management and
oil price
The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Ref ...
analysis and similar to conventional
risk management practice, is a continual cyclic process that includes risk assessment, risk decision making and the implementation of risk controls. It focuses primarily on when and how an organization can best
hedge
A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoin ...
against exposure to fuel price volatility. It is generally referred to as "bunker hedging" in marine and shipping contexts and "fuel hedging" in aviation and trucking contexts.
Providers of fuel price risk management services
Fuel price risk management services are predominantly provided by specialist teams within fuel management companies, oil companies, financial institutions, utilities and trading companies. Examples include:
:Fuel management companies – Mercatus Energy Advisors,
INTL FCStone,
World Fuel Services, Onyx Capital Advisory,
Global Risk Management
:Oil companies –
Total S.A.
TotalEnergies SE is a French multinational integrated energy and petroleum company founded in 1924 and one of the seven supermajor oil companies. Its businesses cover the entire oil and gas chain, from crude oil and natural gas exploration and ...
,
Royal Dutch Shell
Shell plc is a British multinational oil and gas company headquartered in London, England. Shell is a public limited company with a primary listing on the London Stock Exchange (LSE) and secondary listings on Euronext Amsterdam and the New Yo ...
,
ExxonMobil,
Koch Industries
Koch Industries, Inc. ( ) is an American privately held multinational conglomerate corporation based in Wichita, Kansas and is the second-largest privately held company in the United States, after Cargill. Its subsidiaries are involved in the ...
,
BP
:Financial institutions –
BNP Paribas,
Goldman Sachs,
JP Morgan
JPMorgan Chase & Co. is an American Multinational corporation, multinational Investment banking, investment bank and financial services holding company headquartered in City of New York, New York City and Delaware General Corporation Law, inco ...
,
Barclays plc
Barclays () is a British multinational universal bank, headquartered in London, England. Barclays operates as two divisions, Barclays UK and Barclays International, supported by a service company, Barclays Execution Services.
Barclays traces ...
,
Macquarie Bank
Macquarie Group Limited () is an Australian global financial services group. Headquartered and listed in Australia (), Macquarie employs more than 17,000 staff in 33 markets, is the world's largest infrastructure asset manager and Australia's t ...
,
Citigroup,
Morgan Stanley
Morgan Stanley is an American multinational investment management and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in more than 41 countries and more than 75,000 employees, the fir ...
,
Wells Fargo
Wells Fargo & Company is an American multinational financial services company with corporate headquarters in San Francisco, California; operational headquarters in Manhattan; and managerial offices throughout the United States and intern ...
:Utilities –
RWE Supply and Trading GmbH,
EdF
:Independent trading companies – DRW,
Optiver
Optiver is a proprietary trading firm and market maker for various exchange-listed financial instruments. Its name derives from the Dutch , or " option trader". The company is privately owned. Optiver trades listed derivatives, cash equities, ex ...
The fuel price risk management process
Similar to conventional risk management practice,
fuel price risk management is considered a continual cyclic process that includes the following:
:1 Establishing the context
:::current and future business environment
:::financial position and budgets
:::objectives and needs
:::required fuel consumption, etc.
:2 Risk assessment
:::fuel cost calculations
:::risk identification
:::the organization's attitude to risk
:::exposure analysis to fuel price fluctuations
:::scenarios of various hedging strategies
:3 Risk treatment
:::implementation of a fuel price risk strategy
:4 Monitor and review
An alternative to the above described process is the following:
:1 Identify, analyze and quantify the fuel related risks
:2 Determine tolerance for risk and develop a fuel price risk management policy
:3 Develop fuel price risk management implementation strategies
:4 Establish controls and procedures
:5 Initial implementation of fuel price risk management strategies
:6 Monitor, analyze and reporting
:7 Repeat the process on as needed basis
Real investments as risk reduction
Energy efficiency
Energy efficiency may refer to:
* Energy efficiency (physics), the ratio between the useful output and input of an energy conversion process
** Electrical efficiency, useful power output per electrical power consumed
** Mechanical efficiency, a ra ...
measures can be seen as
real capital
In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. At the macroeconomic level, "the nation's capital stock includes buildings, ...
investments that, in addition to reducing fuel costs, reduce exposure fuel price risk. As less fuel is consumed, a smaller cost component is susceptible to fluctuations in fuel prices. The value of this risk reduction can be calculated using the Tuominen-Seppänen method and its value has been shown to be approximately 10 % compared to direct cost savings for a typical energy efficient building.
[Tuominen, P., Seppänen, T. (2017)]
Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings
Energies. Vol. 10, p. 1545.
See also
*
Commodity markets
A commodity market is a market that trades in the primary economic sector rather than manufactured products, such as cocoa, fruit and sugar. Hard commodities are mined, such as gold and oil. Futures contracts are the oldest way of investing ...
*
Commodity risk
Commodity risk refers to the uncertainties of future market values and of the size of the future income, caused by the fluctuation in the prices of commodities. These commodities may be grains, metals, gas, electricity etc. A commodity enterpris ...
*
Energy derivative
An energy derivative is a derivative contract based on (derived from) an underlying energy asset, such as natural gas, crude oil, or electricity. Energy derivatives are exotic derivatives and include exchange-traded contracts such as futures an ...
*
Liquidity risk
*
Market risk
Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility.
There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...
*
Risk modeling Financial risk modeling is the use of formal mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's trading book, or re a fund manager's po ...
Notes
References
*
{{DEFAULTSORT:Fuel Price Risk Management
Market risk
Transport economics