FICC Market Review: Energy Market

It is fair to say that just about everyone, from individuals to big companies, are affected by energy prices. Consumers of energy risk higher costs and producers of energy risk lower revenues. The big question is at what specific price point does the money a business makes (or loses) from energy affect whether the business can make a profit? For Alberta based oil and gas producers, the market conditions since January 2025 have particularly highlighted both the risks and opportunities associated with being an energy producer.

Don’t try to “Win” every time
When managing energy price risk, don’t fall into the trap of thinking you always have to sell when prices are the highest. Companies usually only protect a portion of their production with hedges, meaning they’re still exposed to market fluctuations for the rest. This results in blended prices over time. The goal of hedging isn’t to hit the peak price every time; it’s about gaining some certainty for a portion of your revenues and profitability. This allows you to manage spending within these expectations of future cash flow. Waiting for ideal prices that might never happen can leave you completely exposed to price drops. In “normal” markets, future oil prices are often lower than spot prices, so you’ll usually be locking in a lower price than what’s currently available. You have to ignore this and take what the market offers. 

Short-term shock vs long-term stability

Since January 2025, prompt WTI future prices have fallen steadily from January to May, followed by a brief but violent spike due to Middle East conflicts involving Israel, Iran, and the USA. WTI crude traded between $59-$65 USD/bbl through April and May, before spiking to nearly $75 in mid-June, only to retreat to around $69 by month-end as de-escalation occurred. This short-term fluctuation is a stark contrast to the more stable long-term prices. The Calendar 2026 WTI swap price has stayed within a much tighter range, showing that the market expects long-term supply and demand to be more important than short-term events. Gradually locking in small parts of your future energy sales helps you get a more stable average price over time. This also guards against sudden, big price crashes that could cause financial strain for your business.

How to use volatility to your advantage

A key takeaway from early 2025 is that markets can react very violently to news. But as the news is absorbed, prices tend to return to previous levels if the events don’t change fundamental supply and demand. For instance, the Israeli airstrikes and Iranian response in mid-June caused a sharp but short-lived price increase. This spike led to more hedging by energy producers, allowing them to lock in attractive prices compared to the previous three months. It’s important to note that many producers were adding to existing hedge portfolios, demonstrating the benefit of having a pre-planned strategy in volatile times.

Keys to successful hedging strategies
To summarize, the keys to effectively managing energy price risk include: 

1. Have a clear, board-approved hedging program with proper authorizations, policies, and procedures.
2. Start hedging 1-2 years out and slowly build up your core positions. Trying to perfectly time your hedges, especially given recent unpredictability, can significantly increase your risk.
3. Set orders to take advantage of unexpected market volatility. This lets you add hedges at better prices when there are sharp, but often brief, price spikes.

This article was originally published in The Twenty-Four.