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Fuel price risk management

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A specialization of both financial risk management and oil price analysis – and similar to conventional risk management practice – fuel price risk management is a continual cyclic process that includes risk assessment, risk decision making, and the implementation of risk controls. Fuel price risk management focuses primarily on when and how an organization can best hedge against exposure to fuel price volatility. Fuel price risk management 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:

  1. Fuel Management companies - Mercatus Energy Advisors, INTL FCStone, World Fuel Services
  2. Oil companies - Total S.A., Royal Dutch Shell, ExxonMobil, Koch Industries, BP
  3. Financial institutions - BNP Paribas, Goldman Sachs, Nomura, Barclays plc, Macquarie Bank, Citigroup, Morgan Stanley, Wells Fargo
  4. Utilities - RWE Supply and Trading GmbH, EdF
  5. Independent Trading Companies - DRW, Optiver

The fuel price risk management process

Similar to conventional risk management practice,[1] 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:[2]

  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

See also

References

  • Crockford, Neil (1986). An Introduction to Risk Management (2nd ed.). Woodhead-Faulkner. ISBN 0-85941-332-2.

Notes

  1. ^ "Committee Draft of ISO 31000 Risk management" (PDF). International Organization for Standardization. 2007-06-15.
  2. ^ "The Basic Building Blocks of A De Novo Fuel Hedging Program". The Mercatus Energy Pipeline. Mercatus Energy Advisors. 7 November 2011. Retrieved 9 December 2015.
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