Why Should You Hedge?
Futures were first used in the 1840s to establish a forward pricing mechanism for agricultural commodities. This provided a means for farmers to manage price risk by setting a sale price at planting time. The tools of futures and options became so successful in helping agricultural users manage risk, that markets began offering energy futures as well.
Energy interests today face increased risk from fluctuating prices. So it’s little wonder that now more than ever, energy futures are used to hedge energy price volatility caused by weather, political tensions or other factors beyond your control.
Whether you’re dealing in petroleum liquids, natural gas or most other energy products, the cost of fuel can be a significant amount of your operating budget. And when prices are moving up and down, they can impose an expensive toll on your bottom line.
Many energy industry professionals have turned to hedging mechanisms as a way to protect against price volatility. They may use futures, or options to minimize the risk of major price changes in the energy sector.
Together, we can shape a program specifically for your business with an eye toward monitoring performance success.
Grow Your Business
As companies have become more comfortable with managing price risk using futures and options, many have begun to use price stability as a product differentiator, or as a strategic tool to enhance margins.
For example, you may want to protect yourself against higher prices while passing decreases along to customers, or expand storage at seasonally advantageous prices, or establish floor or ceiling prices for marketing purposes. Perhaps doing all three seems at first like the way to go. Our job is to help you identify the magnitude of potential risks and then help you clarify the goals you’re trying to achieve.
POWERHOUSE can recommend an appropriate hedging program using futures contracts, and options on futures – essentially agreements to buy or sell energy products at some point in the future. Futures market prices closely match cash market prices, making futures an effective substitute for physical transactions. These contracts are available for crude oil, heating oil, gasoline, natural gas, propane, and many other energy price risks.