Sustainability may be taking on a new meaning in 2020. As 2019 ended, the energy industry was abuzz with the growing Environmental, Social and Governance (ESG) movement. Investors started to evaluate companies based on ESG factors on top of traditional financial metrics. ESG investing, or "sustainable" investing, was poised to place added pressure on the industry.

So far this year, sustainability may simply mean survival of the fittest. First, it was the coronavirus (COVID-19) pandemic that slowed the global economy. Crude oil prices started falling, along with global demand. This was then followed by Saudi Arabia's and Russia’s announcement to both increase crude production. The Saudi-Russian price war — and U.S. shale producers — are flooding the market with inexpensive crude oil, causing prices to plummet. Energy companies are now being squeezed on both fronts.

The news of the COVID-19 pandemic and the crude price war are plentiful. But, there’s a third front for energy companies that’s receiving much less news coverage—the cost of shipping crude oil around the globe has skyrocketed. Saudi Arabia backed up their announcement to not curb crude output with the purchase of several very large crude carrier (VLCC) contracts. As a result, the freight rates for Suezmax tankers increased many times over. Crude oil transports typically suited for one VLCC would need to be split across Suezmax tankers.

The other side of the market involves freight purchasers of floating storage. As crude oil demand falls, companies begin to drop anchor and use tankers and supertankers as additional storage capacity, and the result is more cost pressure.

CME Freight Futures & Options Volumes Per Month

(Source: CME Group)

Best Practices For Weathering The Storm

Opportune LLP has been providing services for energy clients in good times and in bad. We help clients become more "financially sustainable" by applying best practices ahead of future challenges, or as a result of lessons learned. We have deep expertise in three key, best practice areas that can make clients more resilient in tough times: Risk Management & Hedging, Commodity Trading & Risk Management (CTRM) Systems implementation and Marine Management.

• Risk Management & Hedging — Our Risk Management & Hedging expertise enables clients to align their risk management capabilities from risk strategy and risk policy development to creating or evaluating hedge strategies through to risk controls.
• CTRM System Implementation — Our implementation of CTRM systems is a core competency that has allowed our clients to execute on their trading and risk strategies, and effectively manage value at risk (VaR).
• Marine Management — Our experience in implementing marine management software enables our clients to effectively manage their marine buys and sells as diligently as they do their commodity buys and sells—through the systematic capture of freight contracts and effective voyage management through to claims tracking and billing.

The emerging marine management software leader, Veson Nautical, has functionality to track Freight Forward Agreement (FFA) contracts that hedge freight futures as a part of an overall hedge strategy.

It's impossible to anticipate events that can cause commodity price shocks. However, through all the global volatility in energy commodity markets, Opportune has the deep energy expertise making companies more resilient and sustainable for the long haul.