With more snow on its way over the next few days, several states continue to deal with "severe" winter weather. Natural gas spot prices have remained steady, even though this winter has seen more natural gas withdrawn from storage than at any other time in history. Interestingly, after last Friday’s storage report showed weekly withdrawals less than expected, spot prices actually ticked down a little.
So, if you are wondering what on earth we are talking about, (no it’s not the latest exposé of power-crazed misogynists, although we hope to goodness those creeps would stop!), it’s price creep we refer to. Week by week, month by month over the last two years natural gas and power prices have been steadily rising, to the point where spot prices are double today what they were two years ago. It’s clear US energy price drivers are changing, and this upward trend is likely to continue for quite some time, so what’s going on and what can you do about it?
Ten years ago, the massive natural gas shale revolution, combined with recessionary demand destruction, brought energy prices crashing down. Commercial and Industrial energy consumers have now become so accustomed to low energy prices, few appear worried by these recent rises. It’s a bit like your favorite penny chew becoming two pennies - who cares?
So here are a few areas to be mindful of when setting your procurement strategy.
Generation – US natural gas demand continues to grow most visibly in electricity generation at the expense of coal. Natural gas is already 33% of the US total compared to coals 30%, something the EIA predicts will be 34% and 28% respectively by 2019. This increase makes natural gas an important factor in the marginal electricity price in many areas.
Exports - Natural gas exports are on the rise too. Sabine Pass, located on the U.S. Gulf Coast near the Louisiana-Texas border, consists of four existing natural gas liquefaction units, with a fifth currently under construction. When complete, Sabine Pass will have a total liquefaction capacity of 3.5 Bcf/d. Five additional LNG projects are currently under construction in the United States, and they are expected to increase total U.S. liquefaction capacity to 9.6 Bcf/d by the end of 2019. That is almost half of the daily natural gas output of the Marcellus shale region.
Demand – Energy demand grows as our economy recovers, and also playing its part, but not to the same extent. Because energy is being used more efficiently today, any significant uptick in demand has so far been curbed. However, any large-scale swings in usage, electric vehicles for example, and we may well see this impact prices too.
As with any commodity, uncertainties in supply and demand drive volatility. Commercial and Industrial energy consumers, have to manage this uncertain cost in their supply chain. Most tend to simply fix their energy cost through one or two-year fixed price supply agreements. It’s a strategy that secures cost for a set period but leaves them exposed to price hikes at contract end or worse competitive risk if prices fall after they have fixed. In short, the tools they are given are very blunt instruments operating in a very precise environment.
To address near-term volatility and the effects of longer-term price creep, Vervantis developed a unique energy contracting process which ensures consumer positions can be actively managed. Using proprietary risk valuation models and supply agreements, energy prices are monitored daily and fixed and unfixed as required (on average 2 or 3 transactions a month) to deliver consumers a smoother, less risky path to achieve their strategy.
During periods of volatility, consumers using this process took ten times less market risk, participated in the market opportunity they would otherwise have missed and enjoyed several years of competitive advantage. The best performers started their process while prices were low, making price creep the worry of their competitors.
For more information: firstname.lastname@example.org
The original proverb can be traced back to an English rhyme by Thomas Tusser in 1573, the actual version being: “A foole & his money, be soone at debate, which after with sorow, repents him to late”. This proverb keeps floating into my conscious. Perhaps because I have been in the energy business for long enough to know that the good times rarely stay for long.
America has seen unprecedented quantities of cheap natural gas flood the markets over the last ten years, so much that it is now the marginal price setter for electric power. This cleaner burning fuel has replaced thousands of gigawatts of coal fired power stations, is being liquified and exported overseas, yet still there is decades of supply available from Americas vast shale reserves. If only market fundamentals drove prices – it would be great.
So which companies are going to benefit in the long term from this lull in prices? Most I speak with are fixing prices forward for a few years in the hope prices rise. Others are continuing with one or two-year strategies, block and index, seasonal strips, even index floating.
Not one energy consumer I have spoken to so far in North America applies a process to correctly manage a commodity like energy. Most see low prices as continuing forever, so spending time on improving controls and setting up processes to ensure they have protection from both rising and falling prices – is not worth the effort.
And so it was 350 years ago. It was almost a hundred years after that proverb that the Great Fire of London occurred in 1666. Starting from a fire in a bakery in pudding lane, it decimated London and took five days to put out. The very next year, the world’s first insurance company was born – but by then of course, the horse had already bolted.
The point is, only the smartest energy consumers investigate and start a process before the storm. Since pioneering energy price risk management for consumers in Europe 17 years ago, I have seen several large cycles of energy price, but the only organizations who came out the other side better off, were the ones who recognized they needed more than a supplier’s market report or a brokers guess to navigate one of the most volatile global commodities.
In US markets, price creep has already started. Natural gas was $1.63 d/th 18 months ago – it is over $3.00 d/th today. A $5m spend on natural gas, just became a $9.2m spend and $4.2m hole to fill in the bottom line. But that probably still doesn’t hurt enough yet. It probably won’t be until the fire has started that energy professionals and their CFO’s come looking for a solution to energy price risk management – by then, much of the damage will have already been done.
Vervantis provides consumers the same techniques utilized in a bank or supplier. Value at Risk calculations are run daily to measure and manage risk correctly. Physical supply contracts are negotiated to allow transactions to be made flexibly. A governance process is wrapped around everything and detailed in a risk policy and sourcing strategy. In this way, CFOs can allocate capital to managing energy price risk in the same way they allocate it to other areas of the business – with clarity and certainty.
The best part though, is that this insurance policy doesn’t cost a cent more than traditional sourcing processes – so there is nothing foolish about that.
Oil steadied after tumbling to the lowest level since before OPEC reached an output-reduction deal as U.S. shale confounds the producer group’s attempts to prop up prices.
Prices are approaching an 8 percent decline this week, bringing the U.S. benchmark crude back to levels last seen before the Organization of Petroleum Exporting Countries signed a six-month deal in November to curb production and ease a global glut. The drop in prices is being driven by expanding U.S. output and concerns that inventories haven’t declined as much as investors had hoped, even as OPEC and Russia signal that the output cuts should be extended.
OPEC’s curbs drove oil in early January to the highest since July 2015, encouraging U.S. producers to ramp up drilling. The result has been an 11-week expansion of American production, the longest run of gains since 2012. Prices are still more than 50 percent below their peak in 2014, when surging shale output triggered crude’s biggest collapse in a generation and left rival producers such as Saudi Arabia scrambling to protect market share.
“Clearly, the faith in the OPEC and non-OPEC deal has just been obliterated. There are whispers and rumors out there that the deal won’t even get extended,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone. “The proof just hasn’t been in the pudding in terms of this accord.”
West Texas Intermediate for June delivery rose 28 cents to $45.80 a barrel at 9:52 a.m. on the New York Mercantile Exchange, after dropping as much as 3.9 percent earlier. Total volume traded was 120 percent above the 100-day average. The contract fell 4.8 percent Thursday.
Brent for July settlement rose 44 cents to $48.82 after slumping as much as 3.6 percent earlier on the London-based ICE Futures Europe exchange. Prices are down 5.6 percent this week, heading for a third weekly decline. The global benchmark crude traded at a premium of $2.59 to July WTI.
Oil market volatility, as measured by the CBOE Crude Oil Volatility Index, jumped to the highest level since December.
“There’s a lot of option-related activities so as the market falls through $45, the holders of short, put positions need to hedge,” said Mark Keenan, head of Asia commodities research at Societe Generale SA. “They need to sell futures and that can drive some very significant and volatile moves through those levels.”
See also: OPEC runs out of options as bid to boost oil price fizzles
U.S. crude production rose to 9.29 million barrels a day last week, the highest level since August 2015, according to the Energy Information Administration. While OPEC is likely to prolong curbs for a further six months, American shale supply remains a concern, according to Nigeria’s oil minister.
OPEC will meet May 25 in Vienna to decide whether to extend the deal.
“There’s disappointment that the production cuts we’ve seen from OPEC and others have not had any impact at this stage on global inventory levels,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The market seems to be much further away from a balanced situation than some had previously forecast. There is a possibility that oil could be headed to the low-$40s range from here.”
Its only a few weeks to go before EEI Spring National Accounts Workshop in Phoenix, AZ.
Vervantis is showcasing it's flexible, risk managed sourcing solution, which brings incredible benefits to both industrial and multi-site energy consumers, just one of a range of solutions designed to address the challenges of buying and consuming energy efficiently.
Source Risk™ is a proprietary risk managed sourcing solution which calculates the Value of Risk you are taking every day, protecting you from cost increases yet allowing participation when prices fall. Delivered through an innovative supply agreement and compliant with accounting practices, it takes the guess work out of energy procurement.
Sustainability is a hot topic, but getting to zero waste requires sophisticated software to take effective action. Collating, validating and inputting data normally drags high quality staff into low value work. Vervantis sustainability solution collects and cleans your data for you. Our team of experts and leading platform does all the hard work in real-time through an innovative set of algorithms and powerful data processing infrastructure returning significant cost savings.
Data Hub360™ - our in-house data portal, providing a window into your entire energy value chain. Mapping locations, tracking savings, checking payments and reviewing contracts or invoices through our secure cloud based platform.
Utility Bill Payment - A recent survey of almost a thousand companies showed that processing utility bills yourself, costs between $7.75 and $12.44 per invoice for 75% of companies. Vervantis provides 100% of invoice data as standard and with some of the best performance stats in the industry, is setting the standard for utility bill payment and analysis.
Government Relations - Vervantis provides government relations, issue management and general consulting services to companies seeking legislative or regulatory relief, in single or multiple states, through lobbying, grassroots and communication strategies. Vervantis works with clients to determine their public policy objectives and then develops strategies to accomplish those objectives in an efficient and ethical manner.
Come and speak to the experts - we look forward to seeing you there - Booth 502
Thank you to all those who came to see us at NET2017 in San Diego this week. A fantastic week of co-operative networking with inspiring conference agenda and speakers. Well done to Touchstone for all their hard work in making it a success. Looking forward to next year in Florida already.
The NET Conference is Touchstone Energy's signature business-to-business conference that brings together national, regional and local energy managers with co-op key account and energy services professionals from around the country. With more than sixteen years of programming, the NET has become an incubator for showcasing innovation, providing national perspective on important industry issues, and demonstrating how businesses and co-ops are embracing the future. Meet with over 400 energy professionals of all roles, including cooperative executives and managers, national business energy managers and industry leaders in our premier exhibitor show and sponsorship program. Vervantis will exhibiting its range of energy solutions for North America from sourcing to sustainability. Follow this link for more information and registration
Vice President Dan Moat, today announced the launch of Vervantis’ new advisory service developed specifically for energy consumers in the Small and Medium Enterprise (SME) category. The new service, available across all de-regulated regions in the United States, helps smaller users of electricity or natural gas get access to the most competitive energy rates available. Vervantis access a pool of over sixty top energy suppliers through an on-line bidding system. Speaking about the launch, Dan said, “This new service is aimed directly at the smaller business owner to help them become more competitive and ensure they don’t leave any money on the table. It now means that Mom and Pop businesses in retail, restaurant, health care and manufacturing will be able to competitively shop for their energy and find a new supplier in literally minutes”. Vervantis VP Operations John Warrick confirmed that from contact to contract could be achieved by his team in the time it takes to make a coffee. With savings for some consumers running into thousands of dollars, it makes sense to check your rates, and one free call is all it takes to find out: +1 888-988-5474
For over a decade, large energy consumers have been using price risk management processes to help drive their energy sourcing decisions with great success. Let’s be honest, if you could manage your energy purchases so that you automatically became more protected (fixed) as prices went up, yet became less fixed (flexible) if prices started to fall – that would be great wouldn’t it?
So why, whenever it is suggested, do energy consumers respond with…
'Our company is too conservative; we can’t use energy price risk management.’
This is really interesting, as in nearly every single case, the companies in question have no idea about the dollar value of the risk they are exposing their organizations too. It reminds me of the movie “The Big Short”, no one understood where the risks were in what they were buying, and didn’t look, so long as everything was okay today, who cared.
Let me give you an example.
I would be surprised if more than 10% of readers could answer more than one question backed by their own data.
The energy category, for most supply chain professionals I speak to, represents just a tenth of their overall tasks, yet unlike many other items being sourced, has the potential to impact profits substantially.
So, to help you, in this article I aim to achieve the following objectives:
What Risks is your organisation currently taking?
I can ask 90% of the large energy consumers in the market place that question and the truth is, they don’t actually know. So the first concern of any reader of this article should be, how do I know if I am conservative if I don’t measure my price risk?
Most organisations currently spend a lot of money on their manufacturing processes with Six Sigma, Kaizen, Kanban total quality and other such techniques. However pretty much any saving your organisation makes with respect to process improvement can be wiped out by the increase in your energy spend in just a few days.
It would therefore only seem logical, that the first step in the process of managing energy cost, should be to apply a similar level of sophistication, diligence and control to your energy spend as you apply to other parts of your business. It’s no more difficult than just measurement.
The chart below gives an example of the sort of information any prudent (not even conservative) company should have available daily; if you do not review this type of information every day you need to question why, and more importantly whether, not knowing the magnitude of the problem makes your behavior conservative.
Is your Behavior Conservative?
In order to help you assess this, we have created the table below to assist you in assessing your position
What Buying Behavior do I want to Have?
One of the biggest misunderstandings in the US energy market today is Risk Management. It is clearly better to determine firstly what your objective is, and then decide what behavior you will adopt to achieve it. You can then consider whether your behavior is conservative or not.
Large consumers have two conflicting objectives with respect to performance against budget and performance against the market. These objectives are opposite sides of the same coin and require senior management to determine the relative importance of each of them. A company that does a fixed price deal to meet its budget, is no more conservative than a company that floats its price with the market; both are the opposite of conservative, speculating that their opinion will turn out to be correct.
In general, the correct answer for any company should be never to be at one extreme or the other but somewhere in between. To this end, many companies consider mixing fixed and flexible contract options for a 70% fixed and 30% market indexed position or a 50:50 position. Whilst this might make sense at the time you take the decision the one thing that is guaranteed is that the market for energy and your company’s objectives will change over time and as such you need to be able to adapt this decision as time goes by.
So if you were to ask yourself whether your company is conservative in its approach to energy procurement, I would like to think that if your answer is yes then you would be able to identify your behavior with the following principles:
Remember ‘Conservatism’ is a method and not in itself an objective. The company following the bullet points above is taking a conservative approach to energy risk management and in doing so can outperform the majority of the market place; the question for you is, are you really as conservative as you think you are?
For more information, contact our sourcing specialists: +1 888.988.5474
It's Utility Budget Season! As 2016 marches on, companies are focusing on 2017 and how much their utilities will cost them. Vervantis is already busy supporting clients with account level budgets which will no doubt need revising again before final submission. Vervantis allow clients to make reforcasts to their budgets down to the account level without charging additional fees, unlike many other advisers with older technology. Accurate account level budgets every time, whatever your size. Contact us now for an informal chat
The process of collecting and paying invoices has just become a whole lot easier, and considerably less expensive.
Vervantis is delighted to announce that a fully integrated utility bill payment and management service is now part of their stable of energy and sustainability solutions across the Americas. The service has the most acclaimed invoice and data capture process, boasting the very best results in avoiding disconnects, late fees and chasing down errors in the industry.
For years, multi-site energy consumers, predominantly in the retail sector, have struggled to keep up with the increasing demands put on their accounts payable teams to manage invoices. Disconnect notices, late fees, missing invoices and billing errors compound the challenges they face. Added to this, most companies internal invoice processing costs are between $7.50 and $12.50 an invoice, a long way from the low levels offered by Vervantis.
So with lower costs, less interruption, and an accounts payable team freed up to do more important tasks, there really isn’t a reason not to take a look.
Watch our video for a short demonstration: www.vervantis.com/energy_accounting.php
Now that is something you can take to the bank!
Capturing 2000+ fuel and business activities, combined with intuitive software and an extensive metrics data library, Vervantis now makes compliance a breeze. The secure, cloud based platform brings an incredible level of flexibility combined with powerful data analytics, and is a must have for all those companies crying out for a sustainability platform at a price that's, well....sustainable. As you would expect from a leading sustainable platform, your global sustainable metrics are captured, measured and reported with ease, providing audit-able compliance wherever you are.
Available either as software only or a fully managed solution, Vervantis delivers this incredible solution along side its suite of energy analytics and invoice management systems for seamless integration, whether you have ten sites or ten thousand.
If you dare to compare - take a sneak peek now. www.vervantis.com/sustainability.php
It was fascinating to watch the drama unfold as UK votes were counted and the true picture of leave vs remain in the EU started to unravel. An initial wave of relief for market traders turned on its head and became a scramble to unwind positions as leave edged ahead and eventually won the day.
As a Brit myself, the referendum was something I was shocked we ever entered into. Something the conservative leadership agreed on to stop the Euro-skeptics within its party once and for all, has truly bitten its own butt hard. Asking people to vote on such an emotional topic, with miserable leadership in the run up to voting, left the population with only one way to vote - with their hearts.
Sadly, the result leaves almost half the population unhappy, so what next for the UK and for Europe?
Firstly, this is just the start of the process, and until the UK notifies Europe of its decision to leave, nothing will change. Once the UK notifies the EU, there is a two year period of negotiation which in itself is open to extension. This will certainly provide the much needed breathing space to get to grips with the enormity of the decision and all the implications not just for the UK but for the wider EU.
Already, factions within several other European countries are voicing their desire for a referendum which the EU will be keen to head off as quickly as possible. This morning, Donald Tusk, EU President of the European Council said he had discussed with all the other EU country leaders the importance of unity and had their assurance - but as we see from the UK and the Prime Ministers resignation - that really doesn't mean much against the will of the people.
What we do know, is that with uncertainty, there is volatility - the markets are in turmoil and Oil, Currency, Bonds and Interest Rates have all been affected - recession talk is back on the agenda.
The dust is yet to settle on yesterdays vote, the EU and the UK have a long road ahead, but for both sides there is still one common goal which is sure to prevail - peace and prosperity - and we all have faith in these powerful drivers delivering a workable solution for the future.
There has been much speculation recently about a recession in 2016, so we take a look at what the drivers could be, are there signals from energy price moves and how this might impact you.
It would appear that a fall in energy prices, normally triggered by falling demand, presents the perfect indication of bad times ahead, and certainly this has been somewhat true with previous downturns. There are many analysts and commodity pundits who believe that the recent drop in energy commodities are a sure sign that bad times are a coming – but do they hold up?
In the chart below the US recessions of 1990, 2001 and 2007 are indicated, showing the start and end of each recession.
We are currently in the territory after the blue star. Chartists might predict an impending recession based on this, but it is not quite that simple. Where previous price falls have been driven by decreasing demand, the recent drop was as a result of global over production. The recent rise in prices has several factors, not least the reduction in stock levels and production across the US.
This, combined with OPEC talks on possible volume reductions (which in reality never bore fruit) and unplanned outages from several oil producing nations has seen WTI lift and hover just under the $50 bbl mark.
Another factor to consider in all this activity is market volatility. Volatility levels in March were the highest since early 2009, when crude oil prices were falling in response to the financial crisis and to a drop in demand for petroleum products. The recent decline in oil prices resulted in volatility levels closer to the 2015 average of 27%. The 30-day measure of oil price volatility (calculated as the standard deviation of daily percent changes in crude oil prices over the previous 30 trading days) reached a high of 45% on March 4 before falling to 33% on April 18. This reduction in volatility is taken by some as an indicator of more certain times ahead.
So how are companies actually performing?
There is some detail here, but it is important to understand the general health of the economy. After results for the first quarter of this year came in, there were some interesting observations. The blended earnings decline for Q1 2016 is -6.8%. The first quarter marked the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008. It also marked the largest year-over-year decline in earnings since Q3 2009 (-15.7%).
Four sectors have reported or are reporting year over-year growth in earnings, led by the Consumer Discretionary and Telecom Service sectors. Six sectors have reported or are reporting a year-over-year decline in earnings, led by the Energy, Materials, and Financials sectors. The decline of 6.8% is better than expectations of 8.8%.
In terms of revenues, 53% of companies have reported actual sales above estimates and 47% have reported actual sales below estimate. The percentage of companies reporting sales above estimates is above the 1-year (50%) average but below the 5-year average (56%).
The percentage of companies beating EPS estimates (71%) is above 5-Year average overall. With 95% of the companies in the S&P 500 having reported earnings to date for the first quarter, 71% have reported actual EPS above the mean EPS estimate. 8% have reported actual EPS equal to the mean EPS estimate, and 21% have reported actual EPS below the mean EPS estimate.
The percentage of companies reporting EPS above the mean EPS estimate is above both the 1-year (69%) average and the 5-year (67%) average.
At the sector level, the Consumer Staples (85%), Materials (85%), and Health Care (82%) sectors have the highest percentages of companies reporting earnings above estimates, while the Energy (53%) and Utilities (55%) sectors have the lowest percentages of companies reporting earnings above estimates.
The earnings surprise percentage (+4.2%) is equal to the 5-year average in aggregate. Companies are reporting earnings that are 4.2% above expectations. This surprise percentage is equal to both the 1-year (+4.2%) average and the 5-year (+4.2%) average.
The market has rewarded upside earnings surprises less than average and has also punished downside earnings surprises more than average during this earnings season.
So what does it all mean?
In normal times, an emerging market panic, a drop in oil prices and a strengthening dollar doesn’t matter much to the United States. In 1998, for example, all of those things were happening, yet growth roared ahead in 1999.
But if there’s a recession in 2016, it will be because of two crucial differences in the economy.
First, the starting point for the United States and other advanced economies was much stronger back then. From 1996 to 1998, the United States economy grew an average of 4.3 percent a year; from 2013 to 2015 the rate was less than half that, 2.1 percent. A much smaller hit to growth would be more likely to put us in recessionary territory now than in the late 1990s.
That lower economic starting point could already be having some psychological impacts that slow growth. Perhaps the weak underlying condition of the United States economy is a reason consumers are largely putting their savings from lower energy prices into increased savings rather than buying stuff. In the late 1990s they felt more confident, and thus cheaper oil was more of an economic boon. If you’re a corporate chief executive making plans to expand your business, surely similar dynamics apply.
So what are we to make of all this? What is the forecast and how can we plan?
The oil market is seeing a climb from the abys, but there will still be pressure from OPEC. Producers with a much lower cost of production like Saudi Arabia will want to see oil stay below the $70 to $80 bbl level needed by US producers. This will maintain their market share until strong economic growth returns and demand increases once again.
While oil and natural gas prices have decoupled in recent years due to the enormous shale discoveries, the downturn in rig counts is beginning to eat away at the oversupply. By November 2016 this, and an increasing appetite for natural gas generation and exports, is predicted to lift prices once again, which are already up significantly from March.
Large energy consumers will need to keep a very close eye on how they manage their energy costs. Commodity price spikes have the ability to dramatically impact earnings, requiring an enormous uplift in sales to keep the status quo. Difficult in a sluggish market.
To manage energy commodities, a strong independent source of information combined with solutions developed specifically to manage these type of dynamics is key, and will certainly define the corporate winners and losers over the next 12 months.
Acknowledgments: EIA, New York Times, Factset, Macrotrends
Since oil prices collapsed in February to their lowest point in recent years, crude has been making a very steady recovery. This morning WTI was over $48 bbl up 80% from its low just a little over three months ago. Oil inventories are in decline for a second week, partly demand driven and partly supply, thanks to Nigeria's unplanned outages - there seems little to stop $50 oil in the next few weeks.
Observers will note that while this increase did not happen overnight, it has happened in a relatively short space of time. This price creep is quite common in recovering markets and has been observed several times in the last 15 years.
Oil is not alone on its upward journey. While natural gas is also being driven by supply and demand fundamentals, (currently a huge oversupply), it has also risen, from mind blowing lows of $1.63 dth in early March. The current levels of $2.05 dth represent a .40c dth increase - that's over 25%!
So, with so much opportunity at stake, I am compelled to ask what action did you take over the last 90 days?
The interesting thing for me, is that large energy consumers rarely have the tools or strategies in place, or even available to them to take advantage of this volatility. I say interesting, but considering how this is far from the first cycle like this - it is really surprising.
Not being able to manage energy volatility seems to be accepted. Large consumers manage it by arbitrarily fixing contract volumes in whole or in part. If their product price is heavily linked to the commodity, they will float on the index. Both without the proper measurement and controls mechanisms are inherently risky.
If your position has volumes yet to be fixed and exposed to the market, the marked to market position is easy to figure out. Forecast volume x Market Price. The problem here, is that if you are trying to follow a strategy, you are always behind the curve in terms of price - you become a reactive price taker.
The key failure of these strategies is they lack an additional metric - Value at Risk. For over 15 years’ energy consumers have been using this metric to great effect. By setting a risk limit (the $ amount you are able to risk by not fixing everything) and measuring the daily change in risk value, you have a mechanism which acts as a trigger.
If the risk of you passing your risk threshold is present, you take action. This will keep your transaction process aligned with your strategy and save any embarrassing conversations with your finance team. As markets drop, risk limits are reset, and as they rise, you begin fixing volumes to keep you not just safe - but ultra-competitive.
These very flexible strategies that have operated in Europe for over 15 years, are currently used by only a handful of companies in the States. But why? The advisers that can support this, do so at a fraction of the cost of a 25% price hike or more.
For now, with natural gas, even after a 25% increase, still far from the $13 dth levels of a few years ago, large energy consumers have yet to feel the pain. But that will change - in fact the oversupply is forecast to be back in balance by the end of this year - just in time for winter!
If you don't yet have a strategy to measure and manage your risk, it’s not too late.
As the pioneers of this process, Vervantis can help. contact us today for more information.
In the last seven weeks, those who have been watching the oil markets, would notice a 50% increase in cost. With a global market in oversupply, and crude stocks fast approaching their highest ever levels, it is right to wonder what might be causing this upward pressure.
The answer in part appears to be shorts! Traders have been getting out of their shorts, and fast! In fact, according to the U.S. Commodity and Futures Trading Commission, it was the largest on record - as the graph below illustrates.
In the last ten years there have only been two other periods like this in 2009 and 2012, which also led to price rally's.
The upcoming meeting of the worlds largest oil producers (OPEC) to agree production levels, has also had an impact, however, this will likely be a difficult discussion for them. If production levels are cut, oil prices will rise, US shale will boom again and they will lose market share and their revenues decline. If they don't, then the oversupply continues, oil prices drop, and their revenues decline.
The Natural Gas market, by comparison, has been falling over the same period - at least spot prices have anyway.
According to the EIA, natural gas will overtake coal as the primary source of generation in 2016. This swing from coal to natural gas fired generation will continue to remove surplus from the market, which combined with the increasing level of LNG exports will no doubt impact prices down the line.
If you are consuming energy, you will know that oil, natural gas, and electricity are inextricably linked, therefore having a clear strategy to navigate your company through all the ups and downs is imperative. Vervantis has a number of solutions for all types of consumer, designed to protect you from increases while keeping you competitive. Vervantis/Supply_Chain_Solutions
The Russian economy, like most oil rich nations, has been taking a beating lately, as the worlds oversupply of oil drove prices to as low as $26 barrel. The Russian government relies on about half of its income from oil and natural gas sales, and set its budget based on an oil price of $50 barrel.
Well, fortunately for mother Russia, oil hungry India, who import 80% of their oil requirements, decided it was time to increase their upstream holdings. In deals reported last week, Indian state run oil companies increased their shares in Rosneft's Siberian fields linked to the East Siberian Pacific Ocean pipeline, which China also has a direct feed from. Three of India's state run oil companies are taking a 29.9% stake (combined) in Taas-Yuriakh Neftegazodobycha estimated at $1.7bn, with the deal expected to close September 16.
Certainly this is welcome news, and income, for the Russian economy and makes good sense for India too, as both parties are keen to diversify their trading partners. But, as oil prices begin to lift into forty dollar-dum, all eyes will be on the massive stock piles of crude, global production levels and demand, as until there is a re-balancing low prices will likely prevail.
The pinch point, according to analysts, is due to come in 2017 / 2018, when the world has eaten into the 523 million barrel global stockpile, this combined with the lack of investment in upstream developments will hit prices hard. According to Neil Atkinson, head of the IEA’s Oil Industry and Markets Division, $300bn is required to maintain current production levels. With US shale companies needing nearer $65 a barrel than $40, the flip in the fundamentals could see us rocketing back up again into $100 territory, while rigs race to come back on line.
Energy consumers are rightly, always trying to determine the direction of energy prices, but keeping up with so many moving parts in a globally traded commodity is challenging at best. Vervantis use sophisticated tools, developed in house, which measure your price risk and chart direction, simplifying your decision process and managing your spend - so you can concentrate on running your business. Vervantis/Supply_Chain_Solutions
Given the rhetoric from generators, you might think so.
There are two basic groups of energy, renewable energy (biomass, geothermal, solar, water, and wind power) and nonrenewable (fossil fuels coal, oil, natural gas, nuclear).
Three quarters of the world’s energy is generated by burning fossil fuels, the US is no different. Yet already, it appears the recent uptick of solar and wind energy for homes and businesses is having an impact on generators. Generators, already struggling with low energy prices, increased emissions regulation, and a drop in demand, are apparently facing a $2 billion drop in revenue.
Solar technology in particular, has become cheaper with incentive schemes driving the increase in installed capacity, which is forecast to continue rising.
For sure, having a mix of generation is invaluable for system security, so having low prices will not stimulate the required investment according to power producers including NRG Energy Inc.
While this shot across the bow may strike some fear into energy consumers and policy makers, who obviously need to keep the lights on, it seems a little premature given the renewable and emissions targets that are being aimed for.
In the oil and gas sector, oversupply and expensive production assets have been taken off line, cheaper methods of extraction are being focused on to compete. The generation sector is no different in this regard, market economics are pretty effective at solving problems that occur from a paradigm shift.
Does this mean that these losses are sustainable? Well, in the long term no, but the real question is whether the generators are willing to re-balance their assets, and change their thinking to adapt to the future, which is undoubtedly going to be greener.
Sustainability is a core focus for both Vervantis and its clients, typically generating between 20% and 30% in cost savings through efficiency and renewable generation projects. Vervantis/Sustainability
As some us awake a little bleary eyed after an hour less in bed, we find the markets have not been sleeping at all. Oil has fallen from a three month high (by just over 3%) on the news that Iran will not be freezing production, at least until it has reached its target output of 4m barrels per day.
That means even less US oil and gas rigs which typically have higher production costs. Baker Hughes reported Friday, that the rig count is at its lowest level since 1949, with only 386 rigs still pumping. To put this in perspective, in 2011, when oil was nearer $100 a barrel, there were over 2000 rigs operating!
Analysts are predicting oil to remain in the range of $37 to $42 a barrel through the spring, so we are unlikely to be seeing $26 for a while. A rally in currencies in emerging markets has added weight to that, with rising global equity markets regaining an appetite for commodity risk. Since February, we can see that rising trend across a number of commodities.
When looking at natural gas, you can see that in the last 10 days, prices have risen around 15%! This creep in price may have gone unnoticed by some, but to any organization using natural gas in volume, this is either a missed opportunity to grab a bargain or a price hike which could have been avoided.
Using the right strategy and advice, organizations are able to take advantage of these market lows and mitigate the risk of this gradual creep becoming a lesson in hindsight management.
Vervantis has several solutions to help companies evaluate the right time to buy, manage risk effectively, and provide all the supply chain support to give you back much more than the hour you lost last night. Vervantis/Supply_Chain_Solutions
In recent days, I have commented on the fluctuating price of oil and the current drivers behind global supply and demand, as well as the low natural gas prices the US is basking in thanks to shale discoveries.
While natural gas consumers are clearly able to benefit fairly quickly from lower prices, i thought i would take a look at how these lower fuel costs are impacting the generation sector and more importantly, the cost of power.
The EIA has indicated that in 2016, electric generating facilities expect to add more than 26 gigawatts (GW) of utility-scale generating capacity to the power grid. Most of these additions come from three resources: solar (9.5 GW), natural gas (8.0 GW), and wind (6.8 GW), which together make up 93% of total additions. If this plan comes to fruition, it will be the first year in which utility scale solar exceeds any other single energy source.
So, you would think, that with all this renewable energy and low cost natural gas capacity that electricity costs would also be heading south. Well you would be wrong. The chart below plots the % change over the last ten years in Crude Oil (WTI), Natural Gas (Nymex) and Retail Power prices (EIA) for both industrial and commercial consumers. As a reference we also added the PJM power wholesale price for the same period.
While we can see that the PJM market, as a single example, is tracking gas prices, across the nation, industrial and commercial retail prices are less so. The steady increase in power cost is unlikely to be dropping anytime soon either with so many additional inputs (renewable levies, generation mix/efficiency, grid costs etc), feeding into the delivered price. So, if this is where we are now, at a time when fuel prices are at there lowest, how do you think this will change when they rise again?
Taking a strategic approach to your energy requirement will help you avoid this continual cycle of increments. It is possible to capture the benefit of low fuel costs, increase your operational efficiency and secure cost, often without needing to provide capital.
Vervantis specialists work with consumers to understand their energy footprint (electricity, steam, heat, natural gas etc), sustainability goals and operational plans. After creating an opportunity "heat" map across all your facilities, recommendations are made on strategies and technologies to reduce cost and increase security. Partners can be invited to convert capital investment opportunities into a secure stream of electric power at a known cost for several years into the future.
90 years ago today, the first successful radio-telephone conversations took place between New York and London thanks to the American Telephone and Telegraph company (AT&T), Radio Corporation of America and Britain’s General Post Office (GPO). Since then the pace of change in telephony and technology has been incredible, enabling global trade and communication to be carried out instantly from pretty much anywhere.
It’s the global trade in oil which has the phone lines buzzing at the moment though, as traders shift their bearish positions to more bullish ones in the face of production freezes and reduction talks aimed at taking the oversupply out of the market. Oil at $20 seems a long way off as the markets trade at around double that number, however, just how far the bullish run will go remains to be seen with Cushing, Rotterdam and Singapore oil ports all at record high levels.
Add to that the fact that, as prices start to increase, producers who have stopped the donkey’s nodding so far will be quick to lock in the gains to begin production again. So it is quite an uptick in demand that will be required to help get the equation back in balance.
Natural gas remains low, very low – 17 year lows in fact. The LNG terminals which will help producers to monetize this enormous oversupply are coming, but a little way from complete as the chart from the EIA below demonstrates.
The new terminals are expected by 2020 to remove around 10Bcf from the market, which added to the increase in gas fired generation and an improving economy, should see a considerable rebalancing of the supply demand equation.
Large energy consumers who are currently basking in the warm weather of low energy prices, are in danger of being caught out by this steady rebalancing, something which has happened more than once before. The key thing to remember, is that consumers are a sink for energy, they are typically not producing, trading or speculating on its future direction. For this reason they need to be diligent in managing their exposure and using more sophisticated tools to help them. Vervantis has created a risk management process designed to make sure your eye is never off the ball by constantly measuring your price risk, and evaluating the best buying opportunities to keep your energy prices low.
More than twice the normal number of oil tankers languish off the coast of Europe's largest oil terminal in Rotterdam, as the port struggles to unload into bloated storage facilities. It is reported that twice the normal number of vessels are outside the port, leaving around 50 patiently waiting.
This side of the pond it's a similar story, the US main storage facility in Cushing, Oklahoma is also at record highs, with an estimated 30 million barrels waiting to discharge. In fact, the oceans of the world have become awash with tankers full to the gunnels, as traders now begin eyeing up storage opportunities in their voluminous hulls to maximize returns from a market in contango.
So what next? With lower cost producers like Saudi Arabia refusing to blink, US oilmen will continue to get frozen out of the market due to their higher production costs. Some might say this is a deliberate ploy by the middle east to take US production off-line and damage a growing upstream independence. Whatever the reason, we do know that it will take some time to re-balance the global market. World storage is now at its highest levels. Almost 3 billion barrels are now tucked away, requiring a significant up-tick in global demand or a drastic reduction in production levels to impact prices in the short term. The expectation is that the cuts to US production will be deeper than expected, lifting prices, but to what degree is the overarching question.
It is the impact on natural gas shale production which is on most consumers minds. The markets show a gradual increase at the moment for 2016, with December, normally an expensive winter month, trading at the $2.50 d/th level. Natural gas storage is at the high of the five year average, but just how this will be impacted with so many rigs dropping off the upstream landscape, is again, yet to be seen.
What we do know, is that enterprises who expect to be consuming energy for the next three to five years, need a plan to secure the price levels they see today. With flexible supply agreements, underpinned by sound risk management, which allows companies to secure volume in smaller parcels, this is something more and more companies are building into their strategic plans. Vervantis/Supply_Chain_Solutions
Yes, today’s blog has it all. As the red carpet is rolled up for another year, tinsel town must be quite pleased that it managed to navigate through the racial diversity row…for now. Chris Rock joked, “You realize if they nominated hosts, I wouldn’t even get this job! You’d all be watching Neil Patrick Harris right now.”
If race wasn’t the main topic last night, then the environment was. After five previous nominations, Leonardo DiCaprio finally won his Oscar for best actor in The Revenant. As an environmental campaigner and fund raiser, he used the opportunity of his acceptance speech to highlight to the world the importance of taking care of our planet. Rather predictably, his stance raised accusations of hypocrisy as he takes private jets, owns several homes and has an enormous yacht. I wonder if he has ever read George Orwell’s Animal Farm?
….and so to oil. Today has seen the continued lifting of oil prices – up 14% since the Russian, Saudi Arabia, Qatar, Venezuela freeze on production to January levels announced on February 16th. US oil output dropped, as did the rig count – down to just 400 now, the lowest levels since 2009. The world currently has a surplus of around 1.7m barrels a day on a demand of 93m barrels – something the markets believe will soon be addressed. We will see what happens next, but money managers are increasing their futures contracts, another clear sign that this upward trend is, at least by some, expected to continue.
Natural Gas (NYMEX) started the day in the $1.69 d/th range this morning before lifting to $1.73 d/th within three hours of trade. These numbers are quite incredible. Just under a year ago, we had prices at $3 d/th – nearly double where we are today. Believe it or not, these swings still cause companies huge headaches. If you are buying $20m of natural gas (delivered) each year, you could have overpaid by $5m if you bought at the peak last year – or think of it another way, your competitors could have paid $5m less. If you think what is required in terms of sales or production, to create $5m in profits – it makes your mind boggle.
Typically, organizations don’t like to budget for their next fiscal year until they are further into the current one, however, this is a situation which doesn’t have to impact the way you buy energy, which can run independently from budget setting and frankly should. Energy buyers are looking further and further forward to see how they can control costs without breaching any of their accounting principles, and products which bring certainty and flexibility to that predicament are being favored.
Vervantis has several solutions to help which bring certainty to the future cost of energy without getting you locked into fully fixed price supply agreements. For more information visit Vervantis/Supply_Chain
Normally, this is my rant to my son hammering away on his drum kit. But it is a sentiment being echoed throughout our oil industry to other global producers who have had no intention of stopping.
It’s the basic rule of economics. If it costs you $50 to make, but you can only sell it for $30, you aren’t going to be in business too long. The numbers may not be accurate, but this is what America’s oilmen are dealing with as oil prices hover around their lowest levels for a decade. More than 70 American producers face difficulties, but they are not alone, Europe too has billions of dollars at risk in the sector (It is estimated that the US has over $120bn at risk and Europe nearly double that). The Saudi oil minister Ali al-Naimi declared at a meeting in Houston this week “lower costs, borrow cash or liquidate. it sounds harsh, and unfortunately it is, but it is the most efficient way to rebalance markets”.
With the banks heavily exposed and production costs already drastically cut, there may be little option left than to close up shop.
But today is a new day, the banks which are carrying a good deal of this exposure, can stop and mop their brows after confirmation of a meeting next month between Saudi Arabia, Russia, Qatar and Venezuela oil ministers to stabilize the market, causing a rally in early trading.
It will be interesting to see, with a global economy still sluggish, how far any production cuts will drive prices and whether it will happen soon enough to stave off a wave of closures throughout the US oil industry. What we do know is that the low price party won’t last forever, and today’s rally may indeed herald the start of a steady climb back to oil in the $70-$80 range.
But what does all this mean for Natural Gas prices? At the moment, we can’t get enough of this more efficient, cleaner burning fuel. The US has switched thousands of megawatts of coal fired generation off in favor of gas and is even increasing its ability to liquefy gas for export. The effect over the next ten years will be significant, taking the surplus away from, by then a more gas dependent market. For those who doubt this will happen, currently Europe depends on a third of its gas from Russia, the predictions are that within ten years the US will be providing almost the same at a lower cost (European gas prices are almost 3 times those in the US) making us a global natural gas power.
For those of you vested in natural gas consuming plant, equipment or generation – now is the time to get the building blocks in place to protect those investments and your return on them. Vervantis has developed a process which helps you manage your future requirements without the need to fix everything today. Our flexible sourcing allows you to take decisions more intuitively, with less risk and better fiscal planning. For more information, go to Vervantis/Supply_Chain_Solutions
Soon after the champagne corks had stopped popping for the new millennium, things didn't go so well for Californian power security. Back then, exploiting rules designed to open the market for competition, the now long departed Enron, manipulated the market by shutting down pipelines and taking generation capacity off line to spike prices. This forced utilities (who had their retail prices capped) to buy power from a market 800% its normal value and sell at a loss. After several months, this cost around $45bn, the solvency of Pacific Gas & Electric (PG&E), near bankruptcy of Southern California Edison and rolling blackouts.
Utilities today are understandably cautious about opening up their regional grids, resulting in an inability to trade excess supplies quickly across their borders. This is a problem for renewable power projects, who are having to turn off generation as it has no where to go and no one to buy it.
Warren Buffett’s Berkshire Hathaway Inc., owns both NV Energy and PacifiCorp, utilities which are determined to change that. Last year Berkshire Hathaway turned on two of the largest solar schemes in California, and is determined to encourage the cross border trade of surplus power. In 2014, the California Grid and Pacificorp started a market allowing power to be dispatched every 15 minutes and NV Energy joined that last year. Others are being encouraged to join, and if State renewable targets have any hope of being met, this has to happen. A climate in which good green power is being turned off will not encourage renewable developers who will struggle to secure investment.
If you are looking for the best way to plan your renewable strategy, Vervantis has the tools to help you navigate the sustainable landscape, mapping out the most advantageous regions to focus your attention and maximize regional incentives. Vervantis/Sustainability
The black blood which runs through the veins of the world’s economies has dominated the news every day for the 20 plus years I have been in energy. It is either too low, too high, running out or in endless supply, and with each forecast and projection, the price responds. It’s down again today as inventory rises.
I have seen lows of under $10 a barrel and highs of over $135 a barrel and with each fluctuation, driven always (regardless of conflict or political crisis) by supply, demand or the expectation of these.
As with any traded commodity, it is the amount of sellers selling, and willingness for buyers to buy which sets the price. At the moment, this is very much a buyers’ market as oil continues to be pumped into a sluggish global economy. As a price setter for natural gas, it has had a significant impact there too, with prices at historic lows.
So the question is, for how long do you think it will continue? Do you care? It’s true, that for some, so long as they can quickly pass on cost directly to their customers, they are ambivalent to whether energy is at the top or bottom of the price curve.
For others, energy is so important to their operations, that price control is the difference between being in business or the soup kitchen. Airlines, auto manufacturers, plastics companies, refineries, chemical companies, (and the list goes on) need time to pass price changes on to their customers.
What we know for certain, is there is not an endless supply. Low prices do not stimulate upstream investment and with global population growing fast (its more than doubled since I was born), it won’t be long before we are back to high energy prices again. By the way, if you want to see something really interesting, check out the population growth clock http://www.worldometers.info/world-population/
This week, IEA Executive Director Fatih Birol, said “It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future.”
He’s not wrong. I have seen it more than once before in the last 10 years alone. To help consumers, we developed price risk management solutions to help avoid price shocks flexibly (which means you aren't in a fixed price straight jacket).
For more information on supply chain solutions and risk management solutions. Vervantis/Supply_Chain
It was this day 34 years ago, that The DeLorean Motor Company went into receivership, leaving us thinking we were destined only to see them in the movies. Well, thanks to a recent change in US regulations, smaller volume auto manufacturers will be allowed to produce up to 325 vehicles a year without all the red tape. DeLorean are hoping to be re-producing their classic gull-wing as soon as 2017.
The energy markets are giving me a similar sense of Deja Vu. It was back in 2003, that energy consumers used only market fundamentals as the prime market price indicator on which to base decisions. As energy prices began to lift upwards (against the fundamental view), organizations were adamant this temporary blip would see sense and recover downward. It didn't, eventually reaching $12 d/th....twice (2005 & 2008). But, then came the financial crisis, demand uncertainty and a significant amount of shale gas, providing the entire economy with much needed relief. So, here we are again, with low energy prices and invincible fundamental market data predicting a low future. We all hope that energy prices remain low, but it is the canny energy buyer who introduces mechanisms to protect against rising prices without fixing everything today. A process where more than one year can be managed. Price shocks which saw so many companies shut their doors for good in 2005 and 2008, can be avoided and managed. The canny energy buyer hopes for the best, but plans for the worst. The canny energy buyer can be found here. vervantis.com/supplychain
Amazing to me that gasoline (petrol for those over the pond), cost's almost as little a gallon in parts of the US as it is for a liter in Europe! The economic benefit to drivers of the fall in gas prices is substantial. According to motoring organization AAA, consumers saved over $115 billion in gas last year. This week saw production freezes by some of the big oil producing nations in an effort to address the oversupply affecting prices. However, given these production levels are already high - the impact has been muted. One thing we know for sure, with a finite resource, the party won't last. As oversupply and low prices are addressed by a reduction in exploration investment, constrained supply and increased demand from a growing economy - many will look back and wonder why they didn't act to secure the benefit of this lull in prices. Vervantis offers both traditional "fixed price" solutions for energy purchasing, and more "flexible" strategies to manage the risk of prices rising in the future. What ever your pressures, Vervantis has the tools to help you meet your goals. Vervantis/Supply_Chain_Solutions
Today, way back in 1817, gas-burning street lights were installed for the first time in the US (Baltimore) lit by men wearing stilts. Seeing natural gas at $1.90 d/th maybe we will get some back! To take advantage of low gas prices, Vervantis, has a range of supply chain solutions to illuminate you, without the need for stilts! Vervantis/Supply_Chain_Solutions
As Arctic ice rapidly disappears, scientists believe the Arctic will experience its first ice-free summer as early as the year 2040! Sustainability is already high on your agenda and likely becoming an even hotter topic. Vervantis has sophisticated, easy to use, cloud based software to turn your balance sheet black and your competitors eyes green with envy. Vervantis/Sustainability
A small energy fact to get you thinking. "Enough sunlight reaches the earth’s surface each minute to satisfy the world’s energy demands for an entire year".
Vervantis has the knowledge, technology and expertise to make your company more sustainable at a cost you can afford. Get in touch to find out how. Vervantis/Sustainability