Commodity volatility prompts a rethink of risk frameworks

In recent years, commodity market shocks – triggered by events such as Russia’s invasion of Ukraine, US tariffs and the most recent Middle East crisis – have become too frequent to be considered and treated as tail risk, says Ken Twomey, director of advisory at capSpire. 

“In this high-volatility environment, spreads are widening and hedging isn’t working as some companies would expect it to if it were a low volatility environment,” he says. These locational and timing mismatches “that may not matter so much in a low-volatility environment, really start to make a difference when prices are spiking.” 

In this interview with Energy Risk, Twomey talks about the major pitfalls firms can fall into when markets are volatile, the phenomenon of false confidence in risk management, and what best practice looks like. 

1.08 – Should commodity firms be treating current volatility as tail risk?

2.45 – How much can firms really shore themselves up against huge price moves?

4.48 – To get a holistic view of risk, what are the issues that need to be considered?

7.24 – What considerations need to be given to managing risk in physical markets?

8.58 – People are not always aware of the optionality sitting in their contracts, are they?

9.52 – There’s a lot of talk about false confidence within risk management. What areas are most prone to this? 

11.45 – What are you seeing firms doing well in terms of risk management practices? 

15.18 – When it comes to running stress tests for volatility, how do you choose which numbers to use without it becoming meaningless?