Hedging
Fluctuations in energy prices make these commodity markets some of the world’s most volatile. We can help you formulate hedging strategies to manage risk and stabilize cost. Based on our knowledge and more than 35 years of combined experience, Houston and Associates employs hedging tools that enable end-users, producers, utilities and marketers to smooth out volatility, facilitate budgeting and act as a form of insurance against sharply higher or lower prices.
Traditionally, hedging is accomplished through the use of futures contracts and/or options. Typically, these financial instruments allow for a commodity to be bought or sold at a fixed price at future point in time. While many firms offer such traditional hedging services, as does Houston, our exclusive partnerships enable us to offer our clients specialized energy products that allow for much more flexibility in managing a hedging program than traditional products afford. At Houston, consumers can have upward price protection simultaneously with downward market participation. Likewise, producers can obtain price assurance along with upward market participation.
Houston and Associates offers two well accepted methods for hedging energy price risk: financially or embedded in your physical supply.
Financial hedging is achieved through contractual agreements with counterparties that agree to buy or sell a certain quantity of a commodity (e.g., oil or gas) at a specified price at an agreed upon future date. The credits or debits from this transaction are then applied to a customer’s physical supply cost or sales revenue when purchased or sold at the current market price for the same time period. This method allows for maximum flexibility on the part of the customer and does not disrupt the current physical supply arrangement. Financial hedging can be used by utilities, end-users, marketers and producers.
In terms of physical supply, imbedded hedging means that the financial hedge activity is performed by the physical supplier and the results of the hedge are applied to the customer’s monthly, physical supply invoice. Customers may prefer this method, as it simplifies the transaction. Imbedded hedging is an option for utilities, end-users or marketers.
Quality counts, therefore, we only recommend and engage counterparties that back their transactions with strong balance sheets and excellent credit ratings. With a combination of both fundamental and technical market analysis, count on Houston and Associates to provide the market intelligence that can help you better execute your hedging program.
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