INTERVIEW: Hedging Firm GRM Sees Shorter-Term Strategies Emerging
Vorgod joined the firm in January, having previously served as global head of FX sales at Danske Bank. Image Credit: Global Risk Management
Hedging firm Global Risk Management, a sister company to marine fuels conglomerate Bunker Holding, is seeing its customers take a shorter-term approach to price risk management in response to the current global economic uncertainty.
Bunker prices have seen record volatility this year, surging to record highs over the summer on supply concerns related to the war in Ukraine before dropping sharply as the prospect of a global recession took over as the main driver.
Shipping companies taking on paper positions to shield their firms from fuel-price shocks are now increasingly looking at shorter-term positions, Martin Vorgod, chief commercial officer at Global Risk Management, said in an interview with Ship & Bunker.
"We are looking into a period here of record-high uncertainty obviously, with the war in Ukraine," Borgod said.
Hedges tend to be of a shorter-term character for the time being.
"Geopolitical risks are definitely on the rise, that goes without saying, but then there's also the economic outlook, the potential for a global recession, and of course how the central banks globally and especially the Federal Reserve have hiked interest rates aggressively.
"What we see, based on our conversations with the clients, is that the length or the maturity of the hedging being deployed is at the short end of the curve.
"People are not locking in prices of marine fuels very far into the future; hedges tend to be of a shorter-term character for the time being.
"I'd say it's the next few months and the next few quarters. A lot of activity, broadly speaking, is taking place at the one-year mark, and there's more on the first and second quarters [of 2023]."
Vorgod joined the firm in January, having previously served as global head of FX sales at Danske Bank.
Global Risk Management was moved out from under the Bunker Holding umbrella in August to become an independent entity within parent company USTC.
Hedging Demand Holding Steady
For now, the demand for hedging the firm sees is holding steady, Vorgod said.
"We only see part of the market, but I would say we are probably seeing around the same volume as we have seen before," he said.
"But the hedges tend to be of a shorter-term character compared to what we have seen previously.
"They don't commit to or lock in prices very far out in the future, as we have seen historically.
"I think the main driver behind the lack of that type of activity is the uncertainty we face."
The vast majority of hedging we see is being done via normal, plain vanilla swaps.
That uncertainty is also holding most customers to conventional strategies, Vorgod added.
"The vast majority of hedging we see is being done via normal, plain vanilla swaps, as we call them -- so fixed-price contracts on the paper side.
"Historically we have seen some clients deploy more advanced or sophisticated hedging strategies, including non-linear instruments like options.
"There are definitely some factors that made it beneficial to look at options -- the value of optionality is very good to have in this market right now, with the very high levels of uncertainty that we see.
"But of course, the flip side here is, when you look at the prices of all options, the prices are very high, as is the implied volatility, which is the main driver of the pricing.
"They don't want to give this optionality away for free or too cheaply.
"That is limiting the activity we see with more advanced strategies as the price is simply just too high for many participants, and therefore the default option is to use normal swaps as the payment instrument."
This year's price volatility has also made hedging against VLSFO price assessments -- rather than markets further removed from bunkers like ICE Brent or gasoil futures -- the more natural choice, Vorgod said. These assessments are relatively novel, having only existed since just before the IMO 2020 transition three years ago, and shipping companies were understood to be wary of them at first.
In the good old days you could hedge a lot of energy exposure simply by trading ICE crude oil futures or ICE gasoil.
"The clients that we are dealing with tend to hedge using this specific class of benchmarks [VLSFO], and to a lesser extent the more generic contracts provided by the exchange -- the ICE Brent crude oil futures or ICE gasoil," he said.
"Those that have used the more generic exchange-traded contracts have seen, post the horrible invasion of Ukraine, that the basis risk on the cracks and differentials between the specific products [fuel oil prices] and the two futures we talked about [ICE Brent and gasoil} have fluctuated a lot.
"In the good old days you could hedge a lot of energy exposure simply by trading ICE crude oil futures or ICE gasoil, but that has been a risky strategy in recent months."
New Business Areas
The decarbonisation of shipping promises new business areas for hedging activity in future, Vorgod said, but actual trading in this field has been limited so far.
"[On LNG] I'm not sure if we have seen any actual trades, but it is something we talk to clients about," he said.
"It's still in the infancy stage, but we do talk about hedging newer and greener fuel types, LNG included.
Down the road we want to deploy our trading muscle in providing liquidity in the green benchmarks.
"Many of the conversations we have with clients are around what our capabilities are in the alternatives space, what is possible on the physical supply side of things and what is possible to transact that on a recent, acceptable bid-offer spread on the paper side of things.
"There are some possibilities, but it's still early days; liquidity is not as good with this type of hedging instrument.
"You have to be a little careful in how you do it properly.
"It's definitely something that we are spending a lot of time on, and down the road we want to deploy our trading muscle in providing liquidity in the green benchmarks."
The introduction of shipping to the European Union's emissions trading system from 2024 also raises the prospect of shipping firms needing to hedge price movements in the carbon allowances market, Vorgod said.
"We have not yet started to see the global shipping community being active hedging [carbon prices], but that is something that is very much on their agenda," he said.
"For the time being they're trying to figure out how they organise themselves around this, who's going to be responsible for the hedging of the market risks related to this, and then there's the whole back end, with a lot of admin to be calibrated in how they do this stuff."
Vorgod takes a conservative view of next year's prospects for the market, saying he expects uncertainty to continue driving shorter-term strategies. But in the event of a serious price drop, some firms may consider attempting to lock in prices for longer.
"My best guess for the time being is that we will continue to see that people tend to concentrate the hedging activity around the shorter parts of the curve," he said.
I don't think the macro uncertainty is going away any time soon.
"Having said that, if we see a sudden significant dip in prices of oil, we know there are clients in this space who can go in and be more opportunistic in their behaviour.
"If we see a massive sell-off in the price of oil, I could see some of the stronger clients starting to look at putting in place longer-dated hedges.
"I don't think the macro uncertainty is going away any time soon.
"People will be on their toes, and they will continue to hedge the foreseeable future of the next few quarter, but the longer-dated stuff and the more opportunistic stuff will probably be very dependent on what the price action is going to be.
"I do foresee that hedging activity, and the number of clients who are looking at this and engaging in these types of activities, will continue to grow, as many companies, with the shipping industry included, got burned by the European energy crisis.
"Across the board, I think we are going to see a pick-up in hedging activities."