How To Manage Pricing Volatility In The Lubricants Market
Oil price volatility has spiked since Russia invaded Ukraine. Calculating the supply effect of sanctions on Russia, one of the world’s largest exporters of crude and petroleum products, has been complicated. There is hope for peace with talks between Russia and Ukraine, and the possibility of eased restrictions on the oil exporters in Venezuela and Iran, and calls on Saudi Arabia to increase production. Consumption might diminish due to the world’s largest petroleum importer, China, facing a possible threat posed by a new surge of Covid-19.
To mitigate the effect of geopolitical risks and economic instability, organisations within the downstream oil industry must move quickly and consider options to secure supply and margins.
Below are a few strategies that may help when facing a fluctuating market.
Rethinking financial strategy
Storage plays are merely one example of the multitude of options that are available. The specific nature of any winning strategy is dependent on the company’s operating position. But at its heart, a winning strategy combines the market outlook with comprehensive insight into the company’s capabilities – from manufacturing capacity and contract obligations to demand outlook, supply availability and commercial flexibility.
Reviewing the supply situation
Reviewing the supply situation for any raw materials that could experience dislocations due to the Russia – Ukraine crisis. Ensure the impact of raw material prices is being closely monitored. If your organisation and market conditions can allow it, one of the things that can be done is to hedge to limit your exposure to rising prices. For any business that buys or sells, the financial team should look into hedging practices via futures contracts, spot trades or options.
Locking in rates with suppliers
The tariffs being contemplated by the U.S. and its trading partners have the potential to significantly impact wide swaths of the economy. If you have good relationships with suppliers, consider negotiating with them to lock in prices for a fixed period. While tariffs are largely beyond the organisation’s control, locking in prices for essential goods can help insulate the business and facilitate planning.
Not absorbing a cost increase
There is a common assumption that customers will not absorb a raw material price increase. Most cost increases affect companies across an industry, and almost all cannot afford to absorb them. A good strategy is to educate your customer on what’s happening and link your conversations with the current situation in the industry. Ensure your team is ready to react by passing increases on to customers when appropriate. No one expects you to sell at a loss.
Building a digital value chain
In order to identify winning strategies, there is a need for a complete view of all existing assets, people and circumstances – because only a fully understood value chain can be reimagined. This is where AI can help. AI-driven, decision-support tools can help rapidly determine which proposals are winners and which can be discarded. Models can be built to show the entire connected value chain and predict demand and disruptions, and to extrapolate scenarios. The ability to quickly test and receive the results of large cross-functional changes will allow commercial and planning personnel to make faster, more proactive decisions.
Emphasising the people-focused business strategy
Put the people at the centre of your organisation. Strive to be reachable, knowledgeable, able and ready to assist and provide market information, which is fundamental to sound decision-making processes.
The evolving marketplace condition in the downstream oil industry makes it challenging to be fully prepared for disruptive changes. A good way forward is to prepare to be resilient in the prospect of a turbulent future and to be responsive to what comes next.