It’s a Risky Business

The last couple of years have seen drastic changes in global practices and attitudes to many aspects of everyday life. Some as a result of the pandemic and others of extreme weather patterns. For example, opinions have changed on vaccination roll outs, the necessity of electric vehicles, and carbon footprints (how more countries are playing a role to reduce theirs).  

The slowdown that we saw in early 2020 – mainly a result of pandemic-induced lockdowns – certainly had a favorable impact on the environment. For instance, the skies of major cities became clearer due to reduced air and road traffic. 

However, it appears there is a gradual push to go back to the way we were, pre-pandemic. And as the world reboots, we are beginning to see the upshot of this U-turn. 

BACK TO LIFE. BACK TO REALITY? 

As industries’ gas and electricity consumption creeps back to pre-covid levels, so too does the cost of these energy products. The return of industries and the expected harsh winter in the Northern hemisphere have buyers in Europe, Asia and Latin America competing for limited supplies of natural gas.  

Natural gas is exported by pipeline or by tanker if in a liquified form. The deficient supplies have been part a result of producers reducing outputs during the pandemic running down reserves. But also due to soaring demands as countries move from coal to gas to generate electricity, as a cleaner fuel (China). Or where droughts have impacted hydroelectric generation (Brazil). Or where wind turbines have not generated enough energy due to poor wind speeds (North Sea).  

Unfortunately, the increase in demand along with limited supply has caused a surge in gas prices, particularly in Europe and Asia. Consequently, shipping companies have diverted tankers to the highest bidder; a practice which is extremely rare. 

 

IT’S A SLIPPERY SLOPE 

 

The knock-on effects of these higher prices have always impacted trading houses’ capital reserves.  

And so the story goes: brokers increase margin calls to ensure trading houses can cover their exposures. And LNG sellers ask for letters of credit to ensure they pay for the gas they have bought to cover contracts. This means that for some of the traders they have less capital to trade, which can in turn impact their profits. 

 

WHEN THE CHIPS ARE DOWN 

This is where an E/CTRM software can assist in evaluating the risk and the exposure to the changing markets. But it’s also important that companies can monitor the different forms of collateral to ensure cash reserves and cash equivalents are being correctly recorded and tracked.  

The ability to ensure other forms of guarantees, such as letters of credit, are managed correctly and tracked, guaranteeing documents and available balances are valid and always up-to-date. 

Ask yourself: how dependable is your risk management strategy? 

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