Natural gas is an extremely volatile commodity and it is important that companies who participate in these kinds of commodity transactions to manage their risk.
Natural gas is used extensively to heat homes and generate electricity, and also in several applications for commercial and industrial purposes. So, it’s considered a very valuable commodity. Natural gas price volatility can directly impact the bottom line of energy producers and consumers. Hence, companies use natural gas hedging to protect their business’s bottom line.
That being said, when it comes to energy risk management, you must implement a sound hedge strategy by using a statistical hedging program.
Why Statistical Models for Hedging Prove Useful?
To make a sound decision pertaining to the timing and placement of natural gas hedges it is important to consider the company’s goals and risk appetite. Hence, the formation of a hedge strategy that uses a statistical model can help a company design and strategy to meet those goals. You are able to access real-time scientifically analyzed data to allow you to better gauge the energy market’s price cycles. In this way, the model you make use of allows you to make an informed decision with regards to timing your hedges, the right maturity to utilize, and the best derivates to meet your strategic goals.
How Statistical Analysis of the Natural Gas Good For Hedging?
Companies involved in either production or who use energy commodities cannot do without an effective energy hedging plan to mitigate the several risks that arise due to volatile energy markets. Therefore, many energy risk managers rely on technical analysis and statistical analysis for making a realistic judgment of their risk exposure.
Through the utilization of technical and statistical analysis, they are able to figure out market cycles and the right time to hedge. Moreover, it allows them to figure the exposure to hedge, the right kinds of instruments to make use of, and when to liquidate or restructure hedges. In this way, the technical and statistical approach, allows for achieving any company’s energy risk management goals, depending on their unique risk appetite.
Managing Risks by Using Statistical Models a Better Approach than Long-term Forecasts
Several energy hedgers unknowingly rely on long-term energy forecasts to make hedging decisions. Long-term price forecasts for energy commodities can be very dicey. Long-term forecasts are most of the times inaccurate since underlying factors change on a daily basis. Short-term forecasts are more effective but have limited use for hedging. So, when it comes to effectively execute a hedging strategy, it is pertinent to decipher the price cycles, that allows gauging when prices are statistically high or low, when to hedge, what exposure to hedge, and what kinds of instruments to utilize. After that, this can be customized for each company’s unique goals and exposure to price risk.
To make the conclusion, any company that produces or utilizes energy commodities has to create a well thought out natural gas hedging strategy. The best approach for such a company is to use a statistically based hedging product, to help create an effective hedging strategy. By doing so, they can improve their risk management strategy considerably.