Written on: April 10, 2023 by Phillip J. Baratz
The changes that we have seen over the past several years can no longer be considered an unlucky string of one-time events. The last few years have presented a new set of realities that must be considered for you to continue to build the legacy of your family or your business.
Prior generations were extremely skilled at dealing with the challenges of their day. The current generation is no more or less skilled, but does need to recognize that the challenges of today are different than those of the past.
1. Price volatility: Although we have had our share of extreme movements in the past, such as the Gulf War and the impact of the real estate bubble in 2008, the past few years have made the extreme seem normal. Be it the COVID-19 pandemic, negative interest rates, runaway inflation or the Russian incursion into Ukraine, we have seen a lot of unpredictable price gyration.
a. Flat Price: Simply put, the effect of world events on the actual and perceived demand for oil and the resulting counterbalance attempts by the world’s oil producers.
b. Basis differentials: We have never witnessed both the size and the longevity of the swings we have seen over the past few years, from the pandemic’s negative numbers leading to an extreme dearth of storage, all the way through last year (continuing today) and the heavy carry costs of oil due to the economics of carrying inventory that is worth less as time passes by (negative forward basis).
2. Electrify everything: Rational thinkers worldwide, and certainly those with working knowledge of what it takes to power and heat the people of our planet, recognize that “alternative energies” such as wind and solar power do have niche applications. Those same thinkers understand that, even if it were proven that there was a compelling case to limit or lessen the use of fossil fuels (I would be preaching to the choir if I gave my full thoughts on the subject), it can’t and shouldn’t be done by political fiat in response to activism that does not consider the potential results of their demands.
3. Delivery logistics: Sure, there isn’t much you can do to change the political winds—the bloodlust of some current world leaders or the activism of some famous 20-year-olds—but if there is one thing you know, it is delivery planning and logistics. Prices might go up and down, but your core customer with the K-factor of five will still consume 900 gallons in a normal year with 4,500 HDDs, right? Not any longer. Those Ks have become 5.5s and 6.2s. You need to anticipate and work with those changes.
The world has changed, realities have changed and challenges have changed. Your role is to do what prior generations did: accept the realities, learn from them and adapt to them.
I mentioned earlier that today’s generation is no better skilled than prior generations. That might be true as far as human brainpower, but not true as far as the ability to recognize and adapt much more quickly than prior generations.
We deal with hundreds of companies that serve over two million residential customers. All of our clients are challenged by new realities, and we spend a good amount of time working with them—not to predict the future, but to work with the present.
The new world can be scary. You don’t have to do it on your own. Many professionals can help you with banking, supply sourcing, risk management/hedging, BI (stop “running those reports” and have them automatically done) and delivery efficiency and optimization. Those who will be successful are those who address the challenges head-on. Assess the challenges that apply to you, and don’t be afraid to “phone a friend.” ICM
PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or to authorize someone else to trade for you, you should be aware that you could lose all or substantially all of your investment and may be liable for amounts well above your initial investment.
