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Fuel price risk management, a specialization of both
financial risk management Financial risk management is the practice of protecting Value (economics), economic value in a business, firm by managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well ...
and
oil price The price of oil, or the oil price, generally refers to the spot price of a Oil barrel, barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crud ...
analysis and similar to conventional
risk management Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...
practice, is a continual cyclic process that includes risk assessment, risk decision making and the implementation of risk controls. It focuses primarily on when and how an organization can best
hedge A hedge or hedgerow is a line of closely spaced (3 feet or closer) shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate ...
against exposure to fuel price volatility. It is generally referred to as "bunker hedging" in marine and shipping contexts and "fuel hedging" in aviation and trucking contexts.


Providers of fuel price risk management services

Fuel price risk management services are predominantly provided by specialist teams within fuel management companies, oil companies, financial institutions, utilities and trading companies. Examples include: :Fuel management companies – Mercatus Energy Advisors, INTL FCStone, World Fuel Services, Onyx Capital Advisory, Global Risk Management :Oil companies –
Total S.A. TotalEnergies SE is a French multinational integrated energy and petroleum company founded in 1924 and is one of the seven supermajor oil companies. Its businesses cover the entire oil and gas chain, from crude oil and natural gas explorat ...
,
Royal Dutch Shell Shell plc is a British multinational oil and gas company, headquartered in London, England. Shell is a public limited company with a primary listing on the London Stock Exchange (LSE) and secondary listings on Euronext Amsterdam and the New ...
,
ExxonMobil Exxon Mobil Corporation ( ) is an American multinational List of oil exploration and production companies, oil and gas corporation headquartered in Spring, Texas, a suburb of Houston. Founded as the Successors of Standard Oil, largest direct s ...
,
Koch Industries Koch, Inc. () is an American Multinational corporation, multinational Conglomerate (company), conglomerate corporation based in Wichita, Kansas, and is the second-largest privately held company in the United States, after Cargill. Its subsidiarie ...
, BP :Financial institutions –
BNP Paribas BNP Paribas (; sometimes referred to as BNPP or BNP) is a French multinational universal bank and financial services holding company headquartered in Paris. It was founded in 2000 from the merger of two of France's foremost financial instituti ...
,
Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...
,
JP Morgan JPMorgan Chase & Co. (stylized as JPMorganChase) is an American multinational finance corporation headquartered in New York City and incorporated in Delaware. It is the largest bank in the United States, and the world's largest bank by mar ...
, Barclays plc, Macquarie Bank,
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
,
Morgan Stanley Morgan Stanley is an American multinational investment bank and financial services company headquartered at 1585 Broadway in Midtown Manhattan, New York City. With offices in 42 countries and more than 80,000 employees, the firm's clients in ...
,
Wells Fargo Wells Fargo & Company is an American multinational financial services company with a significant global presence. The company operates in 35 countries and serves over 70 million customers worldwide. It is a systemically important fi ...
:Utilities – RWE Supply and Trading GmbH, EdF :Independent trading companies – DRW, Optiver


The fuel price risk management process

Similar to conventional risk management practice, fuel price risk management is considered a continual cyclic process that includes the following: :1 Establishing the context :::current and future business environment :::financial position and budgets :::objectives and needs :::required fuel consumption, etc. :2 Risk assessment :::fuel cost calculations :::risk identification :::the organization's attitude to risk :::exposure analysis to fuel price fluctuations :::scenarios of various hedging strategies :3 Risk treatment :::implementation of a fuel price risk strategy :4 Monitor and review An alternative to the above described process is the following: :1 Identify, analyze and quantify the fuel related risks :2 Determine tolerance for risk and develop a fuel price risk management policy :3 Develop fuel price risk management implementation strategies :4 Establish controls and procedures :5 Initial implementation of fuel price risk management strategies :6 Monitor, analyze and reporting :7 Repeat the process on as needed basis


Real investments as risk reduction

Energy efficiency measures can be seen as real capital investments that, in addition to reducing fuel costs, reduce exposure fuel price risk. As less fuel is consumed, a smaller cost component is susceptible to fluctuations in fuel prices. The value of this risk reduction can be calculated using the Tuominen-Seppänen method and its value has been shown to be approximately 10 % compared to direct cost savings for a typical energy efficient building.Tuominen, P., Seppänen, T. (2017)
Estimating the Value of Price Risk Reduction in Energy Efficiency Investments in Buildings
Energies. Vol. 10, p. 1545.


See also

*
Commodity markets A commodity market is a market that trades in the primary economic sector rather than manufactured products. The primary sector includes agricultural products, energy products, and metals. Soft commodities may be perishable and harvested, w ...
* Commodity risk *
Energy derivative An energy derivative is a derivative contract based on (derived from) an underlying energy asset, such as natural gas, crude oil, or electricity. Energy derivatives are exotic derivatives and include exchange-traded contracts such as futures ...
*
Liquidity risk Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price. Types Market liquidity – An asset cannot be ...
*
Market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the m ...
*
Risk modeling Financial risk modeling is the use of formal mathematical finance, mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's accounting ledger ...


Notes


References

* {{DEFAULTSORT:Fuel Price Risk Management Market risk Transport economics