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  • When hedging backfires
  • Unni Einemo
    Petromedia Ltd

    GMT 20:30
    12th Dec 2006
    Over the past few years, many shipowners have enjoyed the benefits of hedging their bunker requirements as oil prices seemed to go only up and up, but since mid-July this year, oil and bunker prices have headed south.

    While this would be welcomed by shipping companies, some of them have reported backfiring hedging policies, with their bunker hedging contracts losing value as the market dropped.

    While hedging is all about managing fuel price risk, does it work best when prices are only moving up (or down)? Have many companies been burnt by hedging polices that did not anticipate that the oil market would stop rising and actually fall? And what approach to hedging looks sensible as we look forward to 2007?

  • Janet Lawrence
    The Oxford Princeton Programme

    GMT 09:57
    21st Feb 2007
    IP: x.x.243.227
    To: Unni Einnemo

    Sorry for the delayed reply. Technology must have failed us, as I was unaware until this morning that this had been posted.

    You've asked an interesting question. Certainly sometimes fixing prices of anything, via hedging, wasn't the best thing to have done when looking at a situation retrospectively. Hedging is designed to fix prices OR, if the hedger is using a product with optionality, to fix the ability to fix prices if needed. It would be great if we always knew which way the market was going to move, but sadly we can't. All we can do is make educated guesses.

    I'm sure that companies have been burnt by going into a hedging program which didn't use the best product for the upcoming market conditions -- or because the company simply made the wrong market assumptions.

    What to do for 2007? I wish I could tell you which way bunker prices were going to go. But I can't. I think all you can do is fixed-price hedge when the price you're locking in is critical to your business and then use other hedging tools with more flexibility (OR, of course, make a decision to perhaps not hedge at all) when you think it could be appropriate.

    Janet Lawrence
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