Commodities are a hedging challenge for corporates
Overall volatility in commodities markets may have dropped from the highs of last year, but uncertainty in specific sectors continues to put pressure on corporate hedging strategies.
Earlier this year, the UK's Financial Stability Board published a report on commodities markets that suggested that certain players in European commodities markets had reduced their hedging of commodities prices last year due to increased margin calls. This was in reference to a decline in open interest in oil and natural gas derivatives markets.
Markets have calmed down recently, but there continue to be short-term spikes. For example, agricultural products spiked in mid-summer and oil and refined products recently crossed the $90/barrel level on news that Russia and Saudi Arabia would extend their voluntary price cuts.
As prices and volatility have decreased, the urgency to implement commodity hedging programmes has declined
“Commodities are always volatile and subject to disruptions in the physical supply chain that drive prices in the financial markets,” says Amol Dhargalkar, managing partner and global head of corporates at Chatham Financial. “We saw a significant increase in commodity hedging in late 2022 and early 2023, although as prices and volatility have decreased, the urgency to implement commodity hedging programmes has declined.”