Market Volatility in the Rearview Mirror Putting Price Protection & Risk Management on Auto-Pilot Over the course of my 30+ year career, I’ve both experienced firsthand and witnessed from a distance the unforgiving nature of market volatility. There have been times in the past, many years ago, when I came to work in the morning to discover the market had experienced a dramatic and unexpected price shock, in either direction, and for several stunned minutes I would search my mind to think what extent my business and livelihood had been affected. The unprecedented market conditions of 2008, with its unimaginable climax and even more dramatic bust, sent shockwaves through our industry and disrupted many energy businesses. Likewise, with the dramatic collapse of oil prices since 2014, there are many energy dealers out there in pain and praying for a bottom. It’s times of market volatility like this we realize how vulnerable our energy businesses are, just one fat tail market event away from serious trouble—a ship out at sea which, given enough time, is statistically guaranteed to encounter a fateful rogue wave. Is this how it has to be? Must everyone in the energy business exist at the mercy of the market? Above the Fray...It’s Possible The days of my ignorance behind me, I am pleased to share that, no, market volatility need not be a continual and existential threat to energy marketers. With a well-conceived and proper program, energy dealers can rise above it and run their businesses smoothly, safely and easily year-round. With the right knowledge, tools and processes, price protection and risk management can go on auto-pilot, relegating market volatility By Gary Sippin Vice President, Sippin Energy Products Co-Founder, Destwin Energy Systems to the bottom of your energy business’ list of concerns. For many decades, heating oil and propane marketers have actively sold price protection contracts, and as an energy marketer myself, I understand what an overwhelming task it can be to manage and administer a price protection program and hedging strategy. The good news is that there are many ways to automate the entire process of price protection and risk management. Price protection and hedging automation not only reduces the amount of labor needed to manage and maintain one’s programs, but also substantially reduces risk by eliminating commitment-delay risk, automating price movement, and providing rapid notification of committed volumes to the hedging desk. The first step in automating this process is to design a price protection program that lends itself well to automation, meets the needs of your customers, is low risk and ensures a healthy margin. The second is to identify the different components that are involved and determine where automation can be implemented. Design a program that benefits both your customer and company Before setting out on an effort to automate a complex program, an energy marketer first must look closely at their programs and ensure they provide good value to customers and will return optimal results to the company. As price protection programs have evolved over the years, certain programs have emerged as more favorable to both the consumer and the energy marketer. In the early years, most price protection programs revolved around pre-buy programs and other fixed-price programs. In recent years, capped-price programs have gained in popularity and proven to offer greater benefit and lower risk to both consumers and energy marketers. Capped-price programs tend to be less price sensitive than fixed-price programs, especially pre-buys. Capped-price programs can also effectively bundle with a budget plan, which is good for your customer and helps company cash flow. Budget plans, moreover, are also a great way of reducing customer price sensitivity. Many marketers have avoided capped-price programs in the past mainly for two reasons. First, many marketers feel their customers may not be willing to pay a price protection fee. This has been disproven many times over, and with effective presentation, disclosure and the aggressive use of budget plans, collecting a price protection fee can be done in any marketing 12 ICM/March/April 2016
ICM March-April 2016
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