Commodity costs are difficult to manage; there are so many different factors that can influence prices that it’s impossible to accurately predict whether the market will go up or down. However, organisations can ensure that they’re protected against the increasingly common price spikes in the market – and can take advantage when prices fall – by taking a more flexible approach to procurement.
The price of Brent oil has been rising for a while – costs have jumped over 60 per cent in the past year, due to rising demand and the restricted supply from the Organization of the Petroleum Exporting Countries (OPEC). Two weeks ago, after the US pulled out of the Iran nuclear deal, oil prices rose to levels not seen since 2014, at over $80 a barrel.
When oil prices spike, it has a domino effect on gas and electricity prices. After the spike in early May 2018, winter 2018 prices for gas and electricity reached 60.65pptherm and £58.40/MW respectively. Other factors are influencing gas and electricity prices too. For example, where gas storage is concerned, we currently have limited capacity in the UK because of the closure of the Rough facility, and, in addition, we’re beginning to see the effects of the summer maintenance schedule on supply and unplanned outages are making the task of restocking storage facilities increasingly difficult.
It’s not just the UK that’s experiencing supply shortages either – gas storage facilities in Europe are at a 10-year low, which is prompting concerns that they won’t have the time or the available supply to restock ahead of winter 2018/19.
In addition, maintenance at the Hunterston nuclear reactor unearthed cracks in the reactor core, meaning the reactor was offline for six months.
When commodity costs are high, it’s understandable that many businesses opt for a fixed energy procurement strategy, so they’re protected if prices continue to rise. At this moment in time, it’s likely that commodity costs will increase further over the short to medium term – but if prices fall in the future, those locked into fixed contracts could find that they’re paying more than they need to for their energy.
It’s not inconceivable that commodity costs could fall – gas storage levels in the UK are recovering somewhat, and we are seeing record summer flows from Russia into Europe. The volume of gas flowing into Europe from Russia could also increase substantially once the Nord Stream 2 pipeline opens in 2019. US gas production is still higher than the increased demand, and it’s possible that the Iranian supply will remain in the global marketplace if all the other world powers remain committed despite the USA’s exit from the nuclear deal.
A flexible future
There’s such a wide range of factors that influence commodity costs that it’s impossible to accurately predict whether they will rise or fall in the future with total certainty, and that’s why it pays to take a flexible approach to energy procurement.
As you make multiple market-reflective buying decisions throughout the duration of a flexible contract, you can take advantage of the ever-changing market by buying when prices are low. Of course, you also run the risk of buying in a bullish market and paying more, but if you have an effective management strategy in place that allows you to re-expose (unlock) volume back to the market you should be able to mitigate this risk.
If your organisation is more risk-averse, you may want to consider Inenco’s Options approach, which offers a middle ground between a fixed and a flexible approach. If you choose Options, our procurement team will spread your volume across up to four different purchasing strategies, tailored to your appetite for risk. We’ll then group your volume together with other clients with similar profiles and trade your volume as one portfolio, so you can benefit from flexible purchasing access no matter the size of your volume.
Inenco’s experts can work with you to find the best deal for you, now and in the future. If you’d like to find out more about how Inenco could help your business, give us a call on 08451 46 36 26 or email firstname.lastname@example.org.