What happens when black swan events in the energy market are just events?
Anyone watching the energy markets in the last year knows that volatility has been the name of the game. Then, Colonial Pipeline was attacked, and the cracks in the system were exposed. Consumer demand for fuel skyrocketed as panic buying set in. This oversized demand wasn’t really necessary – if consumers had purchased gas as always, the supply would have been sufficient. Instead, there were runs on gas in other places where Colonial Pipeline doesn’t even operate. This event was just one of the many over the last number of years that has exposed the increasing geopolitical and geoeconomics risks that can affect the market, making it unpredictable. Black swan events are more like gray swan events – they are happening more often and in more areas.
Give me some context
The Colonial Pipeline attack is just one case where the underinvestment in security and infrastructure was exposed. Let’s look at a couple of other examples of market disruption:
- COVID-19 has been a major economic disruptor around the world in the last year and a half. In the U.S. alone, 200,000 extra business closures happened in the first year.* They simply couldn’t have predicted the impact a global pandemic would have on their businesses.
- The largest attack on an oil field took place in Saudi Arabia in the last two years. This wasn’t something anyone was expecting or had even considered a possibility.
- Energy policy is changing around the world. One example: when the International Maritime Association (IMO) released IMO 2020, a new mandate for maritime fuel, the prices of diesel fuel went up, triggering a trucker strike in Brazil.
- The last time we saw high prices in food and energy was 2011. That uptick in prices led to the Arab Spring and time of global volatility.
The global economy is tightly linked – every action has a response and that response is happening around the world.
What the market is signaling
Geopolitical and geoeconomic risk have not traditionally been considered key priorities in market pricing. It may have been mentioned in passing, but now those factors are squarely in the middle of the story. The distribution of the energy market is much tighter than it used to be and is tied to the volatility in other commodity markets, which had been dormant for years.
Are you prepared?
As black swan – or gray swan – events become more common, companies need to be looking ahead and engaging in risk management that can help hedge against the uncertainty. In trading terms, we are seeing three standard deviation events happen every year, where they may have taken place every five or 10 years previously. This means companies need to change their risk assessments and risk profile to be better prepared for the unexpected. Cargill Risk Management can help – call us today to discuss your risk management needs and prepare for the future.
Sources: The Wall Street Journal: https://www.wsj.com/articles/covid-19s-toll-on-u-s-business-200-000-extra-closures-in-pandemics-first-year-11618580619
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