Ransomware has been plaguing the energy sector for years and it appears this fraudulent practice won’t come to a stop anytime soon.
The first (known) attack on a power grid goes back to the end of 2015 when millions of Ukrainians were left in the dark for more than 6 hours. It took only a few weeks for Israel’s national grid to be hit by a similar attack.
More recently a number of incidents have occurred, targeting software and sensors used by utilities.
Until recently, the consequences seemed to be limited in time and magnitude but the 06th May attack on Colonial Pipeine forced the company to shut down 5,500 miles of pipeline along the East Coast. With 2.5 million barrels a day, the company responsible for the transportation of 45% of fuel used in the region provided no indication of when service could resume hence raising the prospect of shortages and price increases of up to $3 a gallon).
Ransomware unfortunately creates an indisputable business case for better risk management in the Commodity and Energy trading space, despite the US Justice Department’s new and dedicated task force to combat such attacks.
When such events occur, the increase in prices can be counterbalanced with simple hedging strategies using very standard derivatives instruments such as out-of-the-money call options. As tankers and barges line up to compensate for the shortfall of a distribution channel, one can consider that not only spot but also future prices are likely to be impacted. Call options work like insurance: they guarantee some level of return in the event of an increase in future prices against a small premium.
Trading derivative instruments, however, requires the tools that manage the risk of hedging strategies but also go a step further by offering a very precise view of what is at risk e.g. what is the maximum potential loss tomorrow or next week, with a 98% confidence level, if we were to face sudden moves in the market.
Software available today also provides the ability to assess the impact on P&L, with the execution of a trade. A repeat of recent events and the way they disrupted market prices is something that is increasingly possible.
Risk management software used to be expensive to acquire and implement, not to mention the running costs. Systems that have been built specifically for the Cloud have recently disrupted the space and offer solutions that can be deployed within a few weeks, at a fraction of the price. This new type of software has removed not only the constraints of a cumbersome on-premise installation but have also eliminated the risk of using outdated systems.
CTRMCloud offers CTRM as a service, allowing for data to be collected, analyzed and reported in near real time from all areas of the business. Contact us to learn more.