Cheap Oil – Celebration or Contagion? Points for Procurement and a Webinar for Energy Buyers

The volatility of commodity markets has been demonstrated with a vengeance in recent months, with oil prices getting the biggest headlines as they have fallen dramatically. We don't remember lots of analysts, forecasters and industry experts predicting this, so even if procurement practitioners were doing the right thing and keeping abreast of such research, most were not expecting this dramatic change.

The Saudis and other middle east producers have an interest in making shale oil production in the USA in particular uneconomic, whilst demand from China is being affected by the economic and manufacturing slowdown there. Those factors seem unlikely to change soon, and worries about the knock-on effect on other industries linked to oil and gas, as well as deflation, have led to sinking stock markets in recent weeks.

Yet a reduction in oil prices also acts like a tax-cut for any business or household that buys oil, petrol or other related products. A tax-cut would be seen as a positive economic stimulant. So we should, according to some, be celebrating the oil price collapse, rather than worrying about another financial crisis. But the picture is confused. As the Economist says:

"In the past 18 months the price has fallen by 75%, from $110 a barrel to below $27. Yet this time the benefits are less certain. Although consumers have gained, producers are suffering grievously. The effects are spilling into financial markets, and could yet depress consumer confidence. Perhaps the benefits of such ultra-cheap oil still outweigh the costs, but markets have fallen so far so fast that even this is no longer clear."

That brings us onto the first point for procurement to consider now - it is worth looking at which suppliers are gaining from that decline, and whether the time is right for a re-negotiation. Any firm with significant transport costs has seen a windfall gain in recent months. Perhaps suppliers who fall into that category should be sharing that with you?

These events have also been a reminder that whilst you can manage cost risk, you can't eliminate it. Anyone who took a long position on oil (or other energy contracts) before the recent fall is now probably sitting on a "loss" against current market price. Everyone understands that if you don't hedge commodities, then there is a future price risk; but if you do hedge, there is still a (different) risk - that unexpected fall in prices leave you paying more than the market. That needs to be understood by buying organisations too.

Our final point is that you might want to tune in for a timely webinar run by our US colleagues next Monday.

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In this webinar, Insight Sourcing Group’s Tommy Greer and Spend Matters’ Pierre Mitchell will discuss how high-performing procurement organisations are managing their energy spend and the top four ways that you can drive down energy costs. The timing seems very appropriate!

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