Opinion
While geopolitical developments and technical uncertainties create significant doubt as to the levels of future crude supply, forecasting market demand is no less challenging. All major centres of consumption have been affected to some degree by the global economic slowdown. While overall consumption continues to grow, according to the IEA, the rate of growth in global crude demand fell from an annualised growth rate of 3.2 per cent in 2010 to 0.9 per cent in 2012. In Europe, for example, the
“While geopolitical developments and technical uncertainties create significant doubt as to the levels of future crude supply, forecasting market demand is no less challenging.”
Lauren LaFronz, Triple Point Technology
Euro crisis has reduced regional demand for crude and crude products to levels not seen since 1987. Full-year demand in 2011 fell below 13.5 million bbl/day. Tis is 1.5 million bbl/day lower than the 10-year high in 2006, and more than 2.1 million bbl/ day lower than the record high of 1979. And in China, an epicentre for global demand growth over the past decade, oil consumption in 2012 flattened out to the same levels seen in 2011. Furthermore, while the US is still the world’s single largest consumer of crude, the recession of 2009 and a decrease in demand for motor fuels has driven oil consumption down to a 12-year low of 18.8 million bbl/day. However, the future of oil consumption is not relegated to the picture of gloom and doom painted by these numbers. Tere are signs that the economy is starting to turn around. According to the International
Monetary Fund, global economic conditions improved modestly in the third quarter of 2012, primarily due to increased activity in emerging market economies and the US. Despite the global downturn, trading in physical
crude and derivative instruments has been robust over the past few years. Te NYMEX/CME exchange recovered from the financial crisis of 2008, with significant growth throughout 2012. Besides the larger producers, traders, industrial consumers, and merchants that have always participated in the market, many newer players are beginning to speculate with the sole purpose of financial gain. Te oil futures market trades more than one billion barrels of oil each day. Te entire world produces only around 85 million a barrels a day
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– meaning that more than 90 per cent of trading involves speculators, who never actually take physical possession of oil. Tese speculators enter and exit the market quickly, basing trading decisions solely on price momentum and recent volatility.
Solutions Te potential for volumetric shocks on both the supply and demand side of the crude market combined with the potential for increased volatility due to the ‘speculators effect’ leaves companies increasingly exposed to risk. In order to effectively and efficiently manage this exposure, market participants must have sophisticated, end-to-end Commodity Management solutions that provide both the metrics required to measure exposure and the insights needed to successfully manage it.
Tese sophisticated solutions enable crude market participants to:
● Mitigate enterprise risk by delivering a real-time, holistic view of their business that integrates all physical and financial exposures alongside operational, counterparty credit, and regulatory risk exposures.
● React quickly to unforeseen market events and daily volatility by providing advanced analytics that support smarter, faster decision-making.
● Maximise profitability by integrating physical and financial instruments, optimising cross- commodity and FX hedging strategies, and rapidly identifying arbitrage opportunities across markets and products.
● Minimise supply chain risk by providing inventory management functionality and optimizing product movements and complex itinerary scheduling.
Commodity Management solutions are most commonly available in traditional ‘local’ or desktop installations, however, they are increasingly being delivered through mobile platforms and as ‘in-cloud’ solutions, giving users multiple deployment options. Te oil business was built on the reputation of
mavericks and risk-takers. But in today’s climate, the risks are so much greater and the consequences of poor decision-making are far more serious. An inability to manage this volatility-induced risk has an overwhelmingly negative impact on the bottom line. For many businesses it will be fatal. Mitigating these risks with the use of an advanced Commodity Management solution is imperative for any firm that plans on a long-term future and takes its shareholders’ interests seriously. ●
Lauren LaFronz is with Triple Point Technology, London, UK.
www.tpt.com
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