RISK MANAGEMENT
TABLE 1: POSSIBLE RANGES FOR CRUDE PRICES
Geopolitical, Macroeconomic & Regulatory Scenarios
US$50-100 US$100-150 US$150-250
• Iraq stabilises after US • US troops commit to gradual • Israel attacks Iran’s nuclear
leaves. Iran reaches a deployment out of Iraq. facilities. Iran retaliates and
comprehensive agreement Sectarian violence continues. closes Strait of Ormutz.
to abandon uranium
enrichment programme. • Russia invades Georgia • US troops leave Iraq in first
Geopolitical
resulting in mild supply half of 2009. Full blow civil war
• No serious supply disruptions. erupts.
disruptions in major oil
producing countries. • Russia invades Georgia and
Ukraine resulting in serious
supply disruptions.
• Global recession that leads • GDP growth slows worldwide • Economic Growth in
to substantial downturn in but not enough to curb oil Emerging Markets continues at
Macroeconomic
demand for crude and demand substantially current pace.
products.
• Dollar remains at • US Dollar collapses as
• US Dollar appreciates current levels. a result of increasing
against major currencies. ‘twin’ deficits.
• New restrictions on oil • Minor regulation changes • No additional regulation.
Regulatory
futures and OTC derivative that do not impact OTC
instruments for speculative markets.
purposes.
Source: NQuantX LLC..
referring to his successor’s search, that tests or scenarios in the eyes of business area and senior manage-
“Over time, markets will do extraordi- ment.”
2
nary, even bizarre, things. A single, big In the current environment of unprecedented price volatility in
mistake could wipe out a long string of energy and commodity markets, identifying, measuring and man-
successes. We therefore need someone aging thefirm’stactical andstrategicexposures topossible ‘states
genetically programmed to recognise of the world’ is a clear competitive advantage. For example, man-
and avoid serious risks, including those agers at energy-intensive firms such as airlines, ground transporta-
never before encountered. Certain perils tion and mining are finding that managing fuel price risk has
that lurk in investment strategies can-
not be spotted by use of the models
... managers at energy-intensive firms ... are finding
commonly employed today by financial that managing fuel price risk has become
institutions.”
a survival type of decision
A recent report on risk management
practices under extreme events pre- become a survival type of decision and can no longer leave fuel
pared by the Supervisors Group (2008) related costs unmanaged. Food and consumer goods companies
indicated that, “At some firms, a partic- arealsofindingthatmanagingcommoditypriceriskhasbecomea
ular challenge to risk managers was necessity and are quickly investing in building the right infrastruc-
obtaining senior management and ture to manage those risks. Firms like Starbucks, Tyson Foods,
business line acceptance of stress tests Conagra, Procter and Gamble, Hershey’s or Kellogg’s have seen
– in particular, the hypothetical for- theirprofitabilitydeclineduetoincreasesinthepricesofrawmate-
ward-looking scenarios –which seemed rialsandtheirinabilitytopassthefulladditionalcoststotheircus-
extreme to some senior managers.”
1
tomers.
The survey also found that, “Less suc- Frommypracticalexperience,Ihavefoundthatseniormanagers
cessful firms had difficulty getting sen- and board members at many large energy and trading firms are
ior management and business-line often not fully aware of the firm’s actual sensitivity to extreme
management to embrace the use of marketeventsanddisplaya‘we’lldealwithitwhenithappens’or
forward-looking scenarios with large ‘everyone is in the same boat’ attitude to manage events that
underlying price movements and to maysubstantiallyimpacttheabilitytoexecutethefirm’sbusiness
participate in the development and use strategy.
of such tools. According to some risk A few guidelines can assist risk managers in preparing stress test
managers, the larger the shock reportsandparticularlyininfluencingthedecisionmakingprocessto
imposed, the less plausible the stress ensurethatfirmsare‘insured’againstthosescenarios.
12 SEPTEMBER 2008 COMMODITIESNOW
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