For U.S. energy companies, the reality check came on April 20, 2020, the day the per-barrel price for West Texas Intermediate crude oil dropped below zero.
Symbolic and short-lived as this crossing of the “less-than-zero” threshold may have been, it opened eyes across the energy business to the growing importance of the commodity trading and risk management functions, and in many cases, the glaring need for companies to improve the systems that support those functions in order for them to remain profitable and competitive during the volatile market conditions that prevailed then — and persist today. Energy prices, geopolitical tensions, shifting regulatory policies, natural disasters, climate change — these are among the factors that have made commodity trading and risk management more complicated and more important than ever for energy companies.
Amid all the uncertainty, energy companies are moving to modernize their commodity trading and risk management (CTRM) functions not only to better manage volatility to protect their bottom lines, but also to help them identify and unlock value inside their business. As analysts from McKinsey wrote in an article from April 2024, “The shifting dynamics in commodity markets call for trading organizations to invest in new capabilities to capture value.”
A company’s ability to capture value from its CTRM operation depends in large part on a mastery of data, according to McKinsey. “In 2022, data-driven [commodity trading] players captured almost a quarter of the power and [natural] gas value pool, jumping from less than 5 percent in the previous year.”
Gartner likewise recently emphasized data’s importance to an energy company’s CTRM operation, noting, “Data-driven trading is intensifying as energy companies learn lessons from financial institutions by leveraging artificial intelligence (AI) to support modeling markets and elevate market strategies, given the evolving energy landscape and challenges around the lack of historical data management.”
Let’s look at some of the biggest trading and risk management challenges I see energy companies wrestling with, and the steps they can take to better manage volatility and turn their CTRM functions into a sophisticated, data-intelligent value-creation engine.
THE ISSUE: Reliance on a patchwork trading and risk management environment with multiple systems and interfaces that require too much time and manual effort to navigate, and hamper the free flow of data and insight across the business.
THE REMEDY: Create a homogeneous digital environment across the business. Not long ago I was speaking with an energy company executive who estimated that tracing deals from initiation all the way through execution and reporting entailed roughly 80 different system interfaces. Eighty! A disjointed digital landscape like this makes it exceedingly difficult for companies to manage inventory, analyze and manage risk exposure, gain real-time insight into margins and profitability, and identify potential supply-and-demand imbalances. That all changes with a single, homogeneous digital landscape in which front-, middle-,and back-office functions, including CTRM, are integrated with a company’s other key systems, providing end-to-end visibility from trading to risk management to settlement, reporting and profitability analysis. Such an environment gives a company and its CTRM teams a single source of truth — a single set of harmonized master data on transactions, pricing, inventory, logistics, risk, etc. — for better and faster decision-making.
This enables CTRM teams to translate data into trade signals more quickly and with better accuracy. It paves the way for real-time insight into credit exposures, and enables identification and quantification of exposure to commodity price risk based on in-the-moment reporting of positions. It also gives companies up-to-the-second visibility into deal data to better manage supply and demand during times of extreme volatility. And it opens the door for companies to apply intelligent analytics to their data to predict supply constraints, for example, or identify opportunities for arbitrage.
THE ISSUE: Deal capture is convoluted, time-consuming and error-prone.
THE REMEDY: Infuse deal capture processes with intelligent automation. Manually transposing and entering information about individual trades from email communications and other sources — counterparty, material, volume, price, origin, mode of transport, destination and more — is hardly optimal for companies that depend on timely, accurate execution of deals. Infusing generative artificial intelligence (genAI) into deal capture can automate these processes. A trader can prompt a genAI copilot to gather the necessary information to create a deal document and populate any missing information using historical data already in the system. The copilot then prompts the trader to review and approve the deal document. Once confirmed by the trader, it can be routed for risk management review, then if approved there, approved for execution. Automating these processes frees traders to apply their expertise to higher-value work.
THE ISSUE: Renewable energy and other emerging commodities are difficult to integrate into existing commodity trading and risk management systems.
THE REMEDY: Create a digital trading environment that’s flexible enough to accommodate new sustainability-focused products. As rapidly as many energy companies are adding renewables to their product portfolios, their CTRM systems must have the flexibility to seamlessly integrate new products, with the ability to accommodate the unique properties, logistics requirements, etc., of those renewable commodities.
THE ISSUE: Traders and others in commodity trading and risk management operations are resistant to switching to a homogeneous CTRM platform.
THE REMEDY: Invest the time and resources to get employee buy-in. People are averse to change, particularly when they’re asked to move out of their technology comfort zone, to new, automated systems. Will I be automated out of a job, they may wonder? Here’s where it’s critical for companies planning to integrate their CTRM functions within a homogeneous digital environment to proactively explain the “why” behind the move and how the new capabilities to which they’ll have access aren’t designed to replace them but rather to help them do their jobs better. By listening to their concerns, soliciting their ideas for how processes can be improved and providing them solid training on the new tools, they’re more apt to embrace them. And the more they use these tools, the better equipped the business as a whole will be to turn volatility and risk into opportunity.
Ajay Sharma is the Senior Director for Oil, Gas & Energy Downstream at SAP, where he drives digital transformation initiatives for clients in the energy sector. With extensive experience in SAP’s industry portfolio, emerging technologies, and the sustainable energy transition, Ajay is dedicated to enabling customers' digital journeys. His expertise in digital transformation within the oil and gas industry has positioned him as a trusted advisor, helping organizations leverage innovative solutions to stay competitive and sustainable in a rapidly evolving market.
Oil and gas operations are commonly found in remote locations far from company headquarters. Now, it's possible to monitor pump operations, collate and analyze seismic data, and track employees around the world from almost anywhere. Whether employees are in the office or in the field, the internet and related applications enable a greater multidirectional flow of information – and control – than ever before.