Are you paying too much for your hedging program?

Last year’s precipitous drop in oil price before the huge surge this year has caused many end-consumers to re-think their oil price risk management approach. Combined with the exodus of derivative credit line counterparties offering forwards and traditional ISDA hedging services, many sectors such as aviation, refining and oil production that buy or sell oil hedges to budget their variable commodity costs have had to review their old hedging approach, its performance and cost. Enter Onyx Advisory. Our expertise is completely focused in this field, to support board level management in reviewing their oil hedging approach and market access options, including critical cost analysis with full consultative support from Onyx Advisory’s specialist oil derivatives team.

Cost of hedging challenges:

Counterparties/suppliers offering hedge pricing services, such as the banking community, have steadily retreated from the oil swaps market since 2008 and this phenomenon continues to date. As a result, ISDA credit terms have shrunk with less competitive pricing. New entrants offering physical fixed forwards post-2008 aimed to cash in on the Dodd-Frank post-credit crunch derivative reforms, however, they are typically listed corporates with much higher costs and return-on-capital requirements, typically as much as 8-10% and sometimes far in excess of this. The net result, corporate oil hedging whether physical or financial is now more expensive than ever.

Example of the expected cost distribution of hedging – forwards to derivatives across Onyx’ multiverse of SME to large corporates that hedge.

Onyx Advisory’s analysis shows the historic cost of hedges for corporate’s is highly variable with costs inflated far above market value. When studying across the spectrum of physical forwards to financial derivatives and then isolating the supplier's derivative margin; the data is quite clear and reflects not only the provider's variable perception of the value of this ’higher margin’ service but also their exorbitant credit adjustment factors. 

Segments that have seen exceedingly high-cost hedges: -

Shipping: typically plotting in the mid-range on the cost distribution, but with some specific segments plotting far in excess of 200 c/bbl maximum hedge cost on this chart.

Land-based end-consumers hedgers (typically in the US, UK, FE and EU):  diesel and other alternative fuels can be paying far more than 1-5 usd/bbl compared to the local market value of diesel, again at times exceeding the maximum on the above chart.

Airline hedging: the distribution is very variable in this space depending on numerous factors. Typically plotting in the mid-range to the lower quartile.

Oil Producers and refiners: tends well into the upper lower quartile, but frequently creeps well into the upper 50^th centile on the above distribution.

Corporates that trade oil forwards, ISDA swaps and basis spreads need to compare their historic cost data with market value to begin to present the case to change and review cheaper market access routes. This allows senior management to set KPIs to assess, measure and implement the required policy changes.

Onyx’s Solution:

1. Gather forensic cost details – historic and current costs
2. Review market access ISDA or CCP/FCM or combination approach, including cost benefits of any changes and adaptation in the mode of operation
3. Introduce new lesser-known market entrants whom we have partnered with to offer innovative and more cost-effective access to the market
4. Ongoing support implement any changes and to ensure trade costs remain in check

Customer Outcomes:

1. Review with detail plan on reduction in costs
2. Increase counterparties with new, more cost-efficient structures to access credit
3. Set better hedge KPIs with transparent communication to board level

With the speed at which commodity markets are evolving, expert support is required to ensure your hedging operations are not only aligned to strategic objectives but also to the latest developments in derivative markets. Trading costs do not need to be opaque anymore. Onyx will partner with your treasury team to take your oil hedging operations to the next level to minimise costs and maximise hedge efficiency.

The Future

Many often choose to take further ongoing execution timing support from Onyx Advisory, seeking to reduce the cost and increase the performance of their hedging program through better timing decisions taking into full account the corporation's risk appetite and any other key limitations. This is highly desirable for many as Onyx excels in forward risk trade timing. The proof? On average, Onyx is a whopping 10% of the total cleared oil market.

Contact one of hedge consultants today to see how much we could save you! Email us at info@onyxcapitaladvisory.com

Disclaimer:

This publication has been prepared by Onyx Capital Advisory Limited which is regulated by the Financial Conduct Authority. It is provided to our clients for information purposes only and any persons acting on information contained in this publication do so solely at their own risk. The information contained in this publication has been obtained from sources that we believe to be reliable but we do not represent or warrant that it is accurate or complete. The opinions in this publication are those of Onyx Capital Advisory Limited and may be subject to change. The information contained herein is provided as of the date indicated, may not be complete and, is subject to change, and no obligation is undertaken by Onyx Capital Advisory Limited to revise or update it. This publication is directed at eligible counterparties and professional customers as defined by the Financial Conduct Authority. Any kind of reproduction of this publication without written permission by the publisher is strictly prohibited. Onyx Capital Advisory Limited reserves the right to modify content or cancel publications without prior consent or notice. Other firms within the group may hold existing positions (long or short) in the investments described in the publication.