Gas prices are extremely volatile. This means that the price can rise or fall dramatically in a short space of time. This exposes a company to volatile and sometimes high energy costs. Risk management is about mitigating those costs by fixing some or all of a company’s price risk. By 'fixing' - agreeing to purchase some percentage of total gas requirements in the future at the current market price of that gas - a company gains certainty about future energy costs in volatile periods. However, if prices are likely to fall then a company can 'unfix' its gas position and benefit from falling gas prices. Similarly if a company believes that prices will consistently fall as the delivery period approaches they may decide never to 'fix' and receive all their gas at the day-ahead index price.
So how much should a company 'fix' and when? And when should a company 'unfix'?
The answer to these questions depends on a company's attitude to risk:
how much exposure is a company willing to accept to the uncertainties associated with price volatility. It also depends on how well informed a company is about price changes in the future.
Forming a point of view on gas prices is our area of expertise. We at WINGAS understand the drivers that move gas prices and although we cannot tell a company what to do we can help them understand the current issues and what to be aware of when making their decision: for example to hedge or not to hedge. Furthermore we offer the opportunity to reverse those decisions: to actively manage risks by having the flexibility to about-turn on earlier decisions when circumstances change.
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