Energy Cost Shock Awaits the Ill-Prepared

It is not breaking news that oil prices have fallen circa 70% so far this year, and that in some cases barrels have traded for negative prices.  It’s also not breaking news, as a result of this, that energy prices have fallen by approximately 20% since the start of the year. 

What is less well known is that, once demand returns to normal level, oil prices will suffer from an “inflationary oil supply shock of historic proportions” (Goldman Sachs – Oil Views: An Industry Game Changer).

This is because it’s not possible to shut down oil supply to match the drop in demand without a persistent reduction in oil production capacity.  This is what’s happened during lockdown. The costs of re-starting oil production are huge with the implication that it’s not cost-effective to bring back near end of life oil wells. Additionally, wells with a longer production life will struggle to regain the production capacity they had at the beginning of the year.

This means that there is a short window of opportunity to look at securing new energy contracts and benefiting from the low prices.  However, the sting in the tail is that energy suppliers are closing their market to new customers or restricting the opportunities to secure new contracts (due to credit risk fears). 

Some suppliers are also introducing additional clauses/covenants related to usage, which could come back to financially damage businesses months or years later down the line. 

With independent, professional advice it is still possible to access the best contracts, and to model/assess the impact of any additional covenants, and to lock in the low energy prices even if your contracts aren’t ready for renewal for months to come. 

Please contact Jonny Michael at JMCL j.michael@jmclconsulting.com m: 07831 390161 if you’d like to discuss.