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Boris Galonske shares an article that offers guidance on how to navigate turbulent markets.

Managing commodity economics and exposures protecting company financials and decreasing vulnerability

The war in the Ukraine has caused turmoil not only in energy markets but also in broader commodity markets. As such not only companies’ financials are at stake, structural risk exposures and vulnerabilities have surfaced.

What to expect … A new normal …

In February 2022 the war in the Ukraine started adding another element of political risk[1] to the value management agenda. As part of the conflict, Russia has limited gas shipments to Europe. Oil as well as oil product shipments get relocated to non-European destinations. This changes supply-demand economics. Therefore, energy prices have exploded.

For years energy experts have warned that as energy systems and supply are being transformed, a certain level of diversification of primary energy supplies and generation technologies should be maintained. These considerations have not been adequately recognised in energy policy frameworks.

However, a scenario in which Russian gas supplies would terminate did not really exist. Throughout the cold war, Russian gas, oil and coal shipments have been stable and reliable since the early 1970s. There has never been any indication that at some stage energy shipments might be politicised.

Favourable prices for piped gas shipments vs. LNG landed prices were also too tempting to turn a blind eye on energy diversification. A public debate about the need to diversify which started in Germany in the early 2000s ceased.

On the contrary, countries like Spain and the Baltics have been diversifying their gas supplies also driven by a different risk assessment compared to central European countries.

Signs of pre-war constraints in the European energy system – gas and electricity – have passed very much unnoticed by the broader public. As such, it is unlikely that especially energy commodity markets will soon return to a pre-crisis status quo.

Will there be a new normal and how might it look like?

It can be expected that energy prices will plateau on a higher level medium-term given decreasing global investments into energy supply in the last seven years after peaking at USD 1.9 Trillion p.a. in 2014.[2] In this environment, operational and politically induced supply shocks add to price volatility. This again will require to assign more economic capital for interacting with wholesale/trading markets.

Key points include:

• Risk transmission mechanism

• Adjusting risk management systems

• Evolving risk management agenda

Read the full article, Navigating through Turbulent Markets, on Silverbergh.com.