How to Mitigate Risks Through Energy Hedging

Any company with substantial involvement in either the production or consumption of energy will always want to manage its energy price risk. Energy price fluctuations are a normal occurrence and can have a major impact on a company’s bottom-line. Therefore, company’s generally want to manage this risk in an effective way so that they can protect their investments. With this, the question arises, how does one manage price risk? The simple answer to this is the use of energy hedging and an energy risk management plan that can enable the company to meet its risk appetite goals.

Understanding the Difference between Speculative Trading and Hedging

It is very important that the difference between energy risk management, or energy hedging, and speculative trading be understood. Although hedgers and speculators are basically both placing trades their long-term goals are much different.

Speculative traders don’t produce or consume large quantities of energy. They are only concerned with placing trades in the direction of market trends and generating profit based upon those moves. Their holding period may be minutes, to days, to weeks, or more and their strategies vary greatly.

The end goal of a hedger is to protect the price of energy that is being produced or consumed by their company. For example, a producer wants to ensure that they get the highest price possible for commodities like crude oil or natural gas. Therefore, when prices are high and favorable, they use futures or derivates to lock in the price of their products for several months or even years.

Forming an Energy Hedging Strategy

A hedging strategy is the most crucial part of an effective energy risk management program. It can have long-term implications and help define the bottom line of a company’s yearly profit margins.

To arrive at the right decisions for your company the best way forward is validation by statistically analyzed data. To obtain this data you can turn to data analysis tools that an energy hedging solutions company of good standing can provide you. The company you choose will also provide you with a comprehensive series of charts and models to enable the study and monitoring of long-term price cycles.

The consultant will then guide you on how to use these price cycles to time hedges. The charts will give better insights on when to hedge, how much to hedge, and what types of instruments to use. In this way, you’ll be able to use the data that was collected by studying the charts and convert it into valuable information that will help mitigate the risks of price fluctuations in the energy markets.

Using Reports and Forecasts

Any effective energy risk management program should fit in with the hedging company’s goals and risk appetites. Reading the reports provided by a good energy hedging and risk management consultant can be of great help in this case. Ideally, these reports should offer you a quarterly forecast of the energy markets and should contain everything from the future curves in terms of energy pricing to recommendations on the right instrument to use for your hedges.

Valuable Rules to Remember

To successfully carry out an energy hedging program you should consider some general rules. Hedge when the opportunity presents itself, not based on a specific fiscal or calendar year or long-term price forecast. Opportunities occur when strips are at extremes. Choose to not hedge the first nearby contract and often postpone the second and third. Hedge for a longer duration like six months to a year or more, because it often takes this amount of time for a market to revert to its price mean. Lastly, fix forward in small increments, instead of one lump, over a three-to-four-month time span.

Conclusion

A carefully formed energy hedging strategy based on statistically analyzed data can enable companies that produce or consume energy to mitigate risks in the highly volatile energy markets.

WTI Crude Oil

WTI crude oil has been trading in a very indecisive manner as traders seem to be waiting for clarification of recent events or new external factors to drive the next leg lower or higher. This was most evident today after the early move up overcame $68.1 as expected but stalled before reaching key near-term resistance at $69.1. The subsequent decline suggests that whatever factors drove prices higher late yesterday did not fully pan out today and that the overall outlook remains neutral-to-negative.

There is crucial support at $66.3 and prices are already working their way toward that objective this afternoon. The key, however, will be a close below $66.3, which would then clear the way for prices to fall toward the next major objective at $63.9. Even so, the move down will most likely remain a grind, so there is a reasonable chance that prices could temporarily stall at $65.8 and $65.1 as prices fall toward $63.9.

Immediate resistance is $68.1, a level that should continue to hold on a closing basis. Key resistance in the short-term is $69.2, a close above which would shift the near-term outlook to positive and call for another attempt at $70.4 and higher.

Brent Crude Oil

Brent crude oil’s move up stalled again today at $73.93, which was just above last Wednesday’s $73.5 midpoint and the 100-day moving average. The move down from $73.93 then formed a wave that projects to $71.9 as the smaller than (0.618) target. This is an important near-term objective because a close below this would open the way for $71.3 and lower.

Resistance at $73.7 is expected to hold, though $74.7 is still most important for the short-term outlook. Closing above this would be positive and call for key upper resistance at $75.3. Such a move is doubtful though without a surprise bullish shift in external factors.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

WTI Crude Oil

WTI crude oil is trading in an extremely indecisive manner and appears to be waiting on external factors to feed its next move. However, based on the charts and quantitative factors, near-term odds favor a test of at least $68.7 and possibly $68.0 after today’s failed attempt to overcome $70.0 left another long upper shadow on the daily candlestick. The $68.0 target is an important wave projection, retracement, and the 50-day moving average so it is a probable stalling point, at least initially. Settling below $68.0 would open the way for the next leg lower to challenge $67.2 and $66.5.

That said, until prices fall below the $67.87 swing low, which is also in line with the $68.0 target, there is still a reasonable chance for the wave up from $66.92 to extend to $70.4. More recent waves show the connection to $70.4 is made through $69.6, so a close above this would substantially increase odds for a test of $70.4. Even so, key resistance and the gateway for a bullish outlook is $71.2, a level that is still expected to hold, for now.

Brent Crude Oil

Brent’s move up today was a bit bolder than WTI’s but still stalled below $75.1, the 50-day moving average and last level protecting the $75.79 swing higher. The later move up from $74.14 also failed to overcome today’s high and the late pullback setup a wave that projects to $73.9 and lower. Tomorrow, look for a test of $73.9 before prices possibly attempt to reach $75.1 again. A move below $73.9 would call for $73.1, key near-term support, a close below which would clear the way for $72.5 and lower.

Resistance at $75.1 needs to hold on a closing basis for near-term odds to remain in favor of a deeper pullback. Otherwise, settling above $75.1 would call for $75.6 and $76.3. The latter is the gateway for a long-term bullish outlook as discussed in our weekly Commentary and is expected to hold.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

WTI Crude Oil

WTI held the 62 percent retracement of the decline from $72.98 and subsequently broke lower out of an intra-day bearish flag. The 50-day moving average at $68.22 was tested and held on a closing basis, but the break lower out of the flag and the wave down from $70.43 call for $68.0 tomorrow. This is an important objective because it is the 62 percent retracement of the rise from $66.29. Settling below this would be a strong indication the recent move up is over and that prices will challenge support around the $66.29 swing low over the next few days.

WTI Crude Oil - 65 Cent Kase Bar
WTI Crude Oil – 65 Cent Kase Bar

For now, resistance at $69.4 should hold. However, to regain a bullish near-term outlook WTI must settle above $70.6, which would then open the way for $71.5 and higher. This is doubtful given the break lower out of the bearish flag and will become must less probable upon a close below $68.0.

Brent Crude Oil

Brent settled back below the 50-day moving average today and the move down from yesterday’s $75.79 swing high accelerated. Prices are now poised to challenge at least $73.7 and $73.0 within the next day or so. The latter is key for the near-term outlook because it is the 62 percent retracement of the move up from $71.3. A close below this would be a strong indication the recent move up is over and would open the way for $72.0, $71.1, and lower.

Today’s $74.9 midpoint should hold upon a test of resistance. Key resistance and the barrier for a more positive near-term outlook again is $76.6. A move above this is unlikely though unless support at $73.0 holds, which is currently looking doubtful.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

WTI Crude Oil

August WTI crude oil overcame yesterday’s intra-day double top and met this week’s initial $70.9 target. In addition, today’s settle above a key retracement of the decline from $72.7 indicates the move up is unfolding as a five-waves and that the $72.7 swing high will probably be tested before the end of the week. Even so, there are some factors that suggest the five-wave move might stall early tomorrow.

Today’s settle above the 62 percent of the decline from $72.7 and the larger than (1.618) projection of the wave $63.4 – 66.35 – 64.34 confirm the move up from $63.4 is a five-wave trend.

August 2018 WTI Crude Oil - 35-Cent KaseBar
August 2018 WTI Crude Oil – 35-Cent KaseBar

The chart shows that Wave V is already well underway and may have already met a stalling point at $70.91. This is because when a five-wave pattern forms at least two of the three impulse waves (I, III, V) should be equal. Currently, at $70.91, Waves I and V are equal, thus the possibility the move up will stall and begin to pullback early tomorrow. However, even though intra-day momentum is overbought, there are no confirmed reversal patterns that definitively state this will be the case. Therefore, near-term odds favor a continued rise.

With all factors considered, even if a small pullback to test today’s $69.4 midpoint takes place first, support will likely hold and the move up should then extend to $72.7. This is the highest that Wave I projects and the equal to (1.00) target of Wave III. Therefore, at $72.7 the move up would form a very classic looking five-wave pattern that would then be poised for a significant three-wave correction.

Regarding near-term support, $69.4 should hold, though the key level for tomorrow is today’s $68.21 open. Settling below this before $72.7 is met would be a strong indication that the five-wave pattern has ended and that another attempt at $67.3 and lower will ensue.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

WTI Crude Oil

WTI’s corrective wave formation still calls for $67.0. However, today’s high of $66.7 was in line with the upper trend line connecting the $65.69 and $66.24 swing highs. It is also becoming clear that the move up forms a bearish flag. Therefore, while there is still the threat of testing $67.0 and possibly $67.7 (confirmed double bottom’s target), near-term odds have shifted back in favor of a continued decline.

Tomorrow, look for a test of initial support at $65.8, a move below which would call for the flag’s $65.0 lower trend line to be challenged. Settling below $65.0 would be quite bearish and open the way for $64.1 and lower.

That said, a move above $66.5 before prices fall to $65.8 would call for $67.0 to be challenged. Resistance at $67.0 is expected to hold due to the confluence of wave projections and retracements at that level. Settling above $67.0 would call for $67.7 and possibly higher, though this would likely indicate a significant bullish shift in external factors.

Brent Crude Oil

Brent’s near-term outlook is still weaker than WTI’s and has more downside room to extend since WTI led the move down in late May. Brent’s wave down from $77.61 is in position to challenge at least $75.0 and likely $74.5 tomorrow. The latter is most important because it is the 50-day moving average, a close below which would call for a new low of at least $73.7 and eventually $73.1.

Resistance at $76.5 is expected to hold, though the key level for the near-term is $77.3. A close above $77.3 would call for the most important near-term resistance at $77.9 to be tested.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

WTI Crude Oil

WTI crude oil’s trend remains bullish but is still showing signs of exhaustion. Daily and weekly momentum indicators are overbought and setup for bearish divergence, the weekly candlesticks continue to form long upper shadows, and before yesterday’s rise to a new high the daily chart formed a series of spinning tops, a shooting star, and an evening star. The challenge is that reversal patterns like these have been set up for the past few weeks or continue to form, but there has been no follow-through to confirm the patterns.

Today’s pullback and test of yesterday’s $71.9 midpoint provides another opportunity for WTI crude oil prices to follow-through on a much-needed correction. The small waves down from $72.9 call for a test of Monday’s $71.5 open, a close below which would call for $70.9 and possibly lower.

Even so, relative odds (based on the number of times a target is found within our analysis) indicate $70.9 will probably hold and that the move up should extend to $73.2 soon. A move above $72.6 before $71.5 is met would shift near-term odds back in favor of $73.2. This target has the highest relative odds, and due to its confluence is another potential stalling point for WTI. Settling above $73.2 would open the way for $74.4 and higher.

With all factors considered, look for a test of at least $71.5 and possibly $70.9 tomorrow. Support at $70.9 should hold and until proven otherwise the move up will likely extend to $73.2. Therefore, at this point, any pullback will likely be corrective and could provide a buying opportunity for traders that have recently taken profit or missed the opportunity to add to long positions Monday.

Brent Crude Oil

Brent crude oil formed a double top at $80.5 and today’s shooting star reversal pattern setup calls for a test of at least $78.9 tomorrow. A close below this would confirm the shooting and open the way for a test of the double top’s $78.1 confirmation point. This is key support for the near-term, a close below which would call for an extended downward correction to $77.2 and possibly lower (the double top’s target is $75.7).

Brent Crude Oil - Double Top
Brent Crude Oil – Double Top

That said, reversal patterns like the double top and shooting star have been set up repeatedly and failed during the past few weeks. In addition, relative odds indicate that any move down right now will most likely be corrective and that eventually, prices should rise to $81.6. For now, though, $80.0 should hold and key resistance is $80.5. A close above $80.5 would shift near-term odds back in favor of a continued rise to $81.6.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

The overall outlook for WTI crude oil is positive. However, a double top around $71.9, daily spinning top candlestick reversal pattern, and intra-day bearish momentum divergence indicate the pullback from $71.92 should extend to at least $70.4 tomorrow. This target is split between a projection of the wave down from $71.93 and the double top’s $70.26 confirmation point.

WTI Crude Oil - Double Top
WTI Crude Oil – Double Top

An early move below $70.4 will open the way for $69.9, $69.3, and possibly $68.8. Of these targets, $69.3 is the most likely stalling point because it is near a confluent wave projection and key retracement of the move up from $67.63. Even so, $68.8 has reasonable odds because it is split between the double top’s target and the most important projection of the wave down from $71.92.

Should prices turn higher and overcome $71.4, look for another attempt at $72.0, a close above which would wipe out the double top, spinning top, and bearish divergence signals. This would also open the way for the move up to extend to the next major target at $72.8. This is the most confluent objective as discussed in our weekly Commentary and another likely stalling point for WTI.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

WTI Crude Oil Forecast

Late last week, June WTI crude oil broke higher out of a daily bullish flag. This week’s crude oil price forecast indicated there was still a crucial target at $70.1, but this objective was overcome with relative ease Monday. Today’s corrective pullback stalled at $67.63 before settling the day at $69.06. This was just above the upper trend line of the bullish daily flag, and this afternoon prices are already nearly $1.00 higher and have overcome the key 62 percent retracement of the decline from $70.84. Therefore, the outlook remains bullish and the move up is still poised to extend.

The wave formations up from $67.63 indicate WTI should challenge at least $70.6 and likely $71.1 tomorrow. This afternoon’s bullish sentiment (which is purportedly based on external factors) could also drive prices to $71.7 and even $72.8, especially if prices rise above $71.1 early.

WTI Crude Oil - Daily Bullish Flag
WTI Crude Oil – Daily Bullish Flag

That said, when external factors and bullish sentiment are driving the market prices tend to become over exuberant and can overshoot reasonable objectives. While $71.1 and $72.8 make technical sense for the near-term, anything above $72.8 without a reasonable pullback first would warrant caution of a spike type scenario that could reverse very quickly.

For now, look for support at $68.6 to most likely hold with the key threshold at $67.9. A close below the latter would indicate the move up has failed and would open the way for a larger downward correction to $66.8 and lower.

Brent Crude Oil Forecast

Although Brent formed a bearish daily hanging man, prices have risen over $1.00 this afternoon after settling at $74.85. The wave formation up from $73.1 is poised to reach at least $76.8 and likely $77.8 tomorrow. A close above the latter will open the way for $78.6 and $79.9.

That said, the bullish sentiment driving prices higher this afternoon (see WTI’s comments above) could push prices too high too fast, causing a spike type scenario that could quickly reverse. Therefore, caution is warranted on any move above $79.9 over the next few days without a reasonable pullback first.

For now, support at $74.2 should hold, though prices will have to drop below the $73.07 swing low to indicate the move up has failed. In this unlikely case, look for a larger downward correction to $71.7 and possibly $70.8.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial.

June WTI crude oil briefly broke lower out of the recent sideways trading range between nominally $67.1 and $69.5 when it fell to $66.85 today. The settle below April 18’s $67.58 midpoint indicates the near-term outlook is negative, though at this point prices will likely have to settle below $66.7 to confirm the downward correction is going to extend before prices eventually challenge the next major objective at $70.1.

WTI Crude Oil - Daily
WTI Crude Oil – Daily

Tomorrow, look for a test of $66.7, a close below which would open the way for $66.0 and lower. Even then, WTI crude oil still has a long way to go before the long-term outlook becomes bearish, so any move down right now will most likely be corrective.

That said, prices settled just above the bottom of the recent trading range and the small wave formation up from $66.85 indicates a test of today’s $67.9 midpoint might take place first. A close above this would call for key near-term resistance at $68.6. For the downward correction to extend to $66.0 and lower this week $68.6 must hold. A close above this would shift near-term odds back in favor of $70.1.

This is a brief analysis for the next day or so. Our weekly Crude Oil Forecast and daily updates are much more detailed and thorough energy price forecasts that cover WTI, Brent, RBOB Gasoline, Diesel, and spreads. If you are interested in learning more, please sign up for a complimentary four-week trial