Formulating Strategic Commodity Procurement Plans to Navigate Market Fluctuations

in May 6th, 2024

By Keith Sampson, Senior Vice President, Energy Services

Many electricity and natural gas customers are actively contemplating their next steps regarding their future supply strategy. In my 17 years at Competitive Energy Services (CES), I have seen the current market trends before. I’ve learned from the past that energy market volatility is ever-present because these are traded commodities and that the solution to high price is high price and the solution to low price is low price. What that means is that in an environment where market prices are high, supply will increase as production chases price premiums, and the inverse is true in a low-price environment, where producers will reduce output. This blog aims to highlight market trends, universal best practices and an example strategy platform designed to mitigate and diversify the risk of overpayment for energy commodities. This platform works because of the underpinnings of output levels being adjusted in response to commodity prices.

Companies and Institutions with future uncontracted supply commodity contracts face a deluge of opinions and sales pitches, each offering speculative forecasts about what lies ahead for natural gas prices and resulting electricity pricing. Opinions range from advocating for immediate long-term locking due to current market lows and anticipated future supply increases due to LNG exports and lower production to advocating for leaving supply unhedged based on historical spot market advantages. The reality is that all these viewpoints have merit and decision-makers are left with complex choices regarding when, how much, and for how long to lock in supply contracts to effectively plan and budget for the future.  

With more than two decades of experience in energy markets, CES has assisted numerous clients in formulating and executing strategic commodity procurement plans to navigate market fluctuations. Through this extensive experience, CES has identified fundamental best practices that underpin effective commodity procurement: 

  • Conducting an apples-to-apples bid with multiple suppliers.
  • Recognizing the nuances in supplier pricing structures and understanding all cost components.
  • Providing suppliers with accurate usage and forecast data to facilitate competitive pricing.
  • Managing financial risk by aligning budgets with procurement strategies, leveraging current market futures as a baseline for strategic implementation.
  • The most important market factor that drives commodity prices is rooted in fundamental supply and demand components, however because commodity prices are ultimately determined based on trading activity, prices tend to overreact to the extreme due to supply and demand fundamentals.

Despite the primary influence of fundamental supply and demand dynamics on commodity prices, market volatility often leads to price overreactions. Consequently, true market timing becomes exceedingly challenging, making diversification a valuable risk management tool. Diversification encompasses various strategies, including term contracting, timing-based procurement, baseline benchmarking, and correction anticipation based on oversold or overbought market conditions.

Drawing from these principles, one such strategy CES has developed is blending fixed and variable pricing elements, comprising three distinct components: 

  • 33% fixed through routine timed hedges, leveraging dollar-cost averaging principles.
  • 33% utilizing a ratcheting ceiling based on market lows to provide price protection.
  • 33% sourced from spot or non-fixed markets to capitalize on market range dynamics and eliminate fixed cost risk premiums.

This strategy offers the dual benefit of budget stability through fixed pricing components and flexibility through variable pricing, providing a forecast based on a balanced blend of fixed, and spot market prices. By incorporating principles of dollar-cost averaging, market low-based ceiling settling, and spot market dynamics, CES’ strategy effectively manages procurement risk while optimizing cost efficiency and budget predictability.

For more than 24 years, CES has been helping customers understand market trends, best practices, and strategies to mitigate the risk of overpayment while maintaining an accurate forecast of future costs. Each strategy is tailored based on individual risk tolerance and current market conditions. To learn more about adapting this proven approach to specific needs, contacting a CES Energy Services Advisor is recommended for personalized guidance and assistance. I also invite you to join our spring virtual seminar titled “Energy & Renewables in Focus: Continued Price Stability or a Return to Volatility? where my colleagues, Charlie Agnew, Vice President, Energy Services and Zac Bloom, Vice President, Head of Sustainability and Renewables, and I will provide additional detail and market insights.

Photo by Absolutvision


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