5. Monetize volatility
No one knows how all of this is going to turn out. In the time it takes this cycle to play out, there will almost certainly be feints toward recovery and temporary setbacks. That’s the way commodity markets work. Companies in our industry are used to that, but our customers aren’t necessarily.
In addition to trading opportunities that have been present in abundance for the last two weeks, volatility creates at least two other opportunities. Companies can make a market, simultaneously buying and selling a commodity to less informed and connected players, earning a bid-offer spread. Companies can also offer complex risk-management products to commodity consumers or producers with less developed capabilities. They can either warehouse those risks or hedge them opportunistically, again earning a margin. As running those types of businesses successfully requires at the very minimum 1) the ability to sweep up and process large volumes of market information and 2) the capacity to measure and control risks in a very sophisticated way, only those with mature and scaled trading functions will fully be able to take advantage of this market opportunity. However, whether and how to engage with these players will be a question everyone needs to answer.
Supply chains should brace for impact
Service companies will be hit particularly hard in this downturn. They’ve never really recovered from the previous one and the underlying conditions (oversupply and market fragmentation) are still there. The same bits of advice hold for them, with increased urgency and a few twists.
There was an expectation of a wave of consolidation in the wake of the last downturn that never materialized. This time, financial necessity might force the issue, and consolidation might go hand in hand with financial restructuring. This time, capacity really does need to be removed from the market. The imperative to make costs variable will be especially important as cash becomes scarce. Lastly, service companies will need to focus their capital on parts of the world where there is the least risk of projects not moving forward. That means low costs and short lead times.
It is going to be bumpy for the next few quarters, and it looks like the industry will finish the transformation it started last time. However, the world’s medium-term energy requirements and energy mix are (at the moment) going to look similar to how they did coming into this downturn, so eventually a return to a more “normal” market driven by fundamentals will happen.