Damned If You Do, Damned If You Don’t

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With Europe energy pricing rising from the extreme to the ludicrous in the past few weeks – commercial and industrial consumers with open positions in the second half of 2022 (H2/2022) and calendar 2023 (CAL23) have to make some difficult decisions. Do you buy now at these extraordinary levels out of fear that it could get worse in the coming months? Or do you continue to hold out and endure the pain for the “inevitable” pull back sometime in the future. This is the hellish dilemma reserved for those who have not hedged most or all their requirements months ago.

For those with open exposure, there is a third route. This alternative consists of purchasing an important level of protection for the most perilous periods Q4/22 and Q1/23 and more modest levels of protection for the remainder of 2023. Buying coverage for the winter periods will not be cheap today, but it will provide a level of budget certainty. More modest coverage for the remainder of CAL23 provides optionality. Using this alternative strategy, we don’t have to make an all-or-nothing decision.

The conflict in Ukraine cannot last forever. There is a reasonably strong probability that Europe, once winter sets in, gas becomes even more scarce, and its economies are adversely impacted, will look to strike a compromise with Russia. Such a compromise would likely allow Russia to retain de facto control of the Southeastern regions of Ukraine in return for a partial lifting of sanctions. If such a settlement were reached and Russian natural gas started flowing back into Europe, energy prices would quickly and sharply drop from ludicrous to merely extreme (or just expensive) levels.

The only thing that will feel worse than buying energy at today’s prices will be paying today’s prices when market prices fall in the future.

More: Energy Market Commentary, Natural Gas, Ukraine Crisis

Richard Soultanian