TOKYO, March 8 - Japanese oil consumers, shocked in recent months by a price collapse and a deepening recession, are again starting to cautiously insure themselves against the risk of an oil price rebound, although deep uncertainties about the outlook continue to stymie hedging activity.
From niche ski resorts to major refineries, Japanese corporates have never been aggressive about locking in their future energy costs, leaving many exposed last year when oil roared to a record near $150 a barrel.
While relieved to see prices collapse in the months after that, most have been reluctant as yet to bet that this is the market bottom, or have been thwarted by the high cost or difficult access to hedging caused by a credit crisis that froze lending -- and credit lines -- for big and small firms alike.
Now that the freeze is beginning to thaw and prices are showing signs of stabilising around $40 to $50 a barrel, some are once again testing the waters of risk management -- cautiously.
"Demand is rising only in short-term hedging of less than a year, as hedging costs have come down a lot lower than levels previously thought," said Shun Ohashi, an assistant manager in the energy market team at Sumitomo Corporation.
"Some who had not been able to buy hedges before are coming in because prices have fallen, while others are considering procuring hedging," said Ohashi.
Still, risk managers say the combination of still-volatile oil prices and a deeply uncertain economic outlook are keeping most big players on the sidelines.
At the same time, it is a bigger challenge to find a bank ready to take on a big chunk of business, as the financial crisis has taken a toll of foreign banks such as Citigroup and Goldman Sachs major providers of risk services globally.
Countering this effect, however, is the fact that those banks often have decades of experience in the sector, while most domestic players have been in the business a few years or less.
"In order to get the same amount of hedging as before, customers must tap more firms, but the number of players that can offer hedging has dwindled," said Tatsufumi Okoshi, senior economist in the commodities research at Nomura Securities.
"There are some moves to boost hedging ratios by those who had stayed away when high oil prices had made hedging risky."
The head of Nomura's domestic commodities team, which was formed only a year ago, said last month he hoped to double its business by year's end.
BIG TO SMALL
Consumers' hedging demand typically grows when they want to guard against future price rises in commodities they consume, but the sharp drop in oil prices from a record near $150 just half a year ago makes current costs reasonable, traders say.
"We see demand not only from transportation firms but trading houses and a wide range of private-sector firms which need to carry oil for their factories," said a dealer at a European securities firm.
Japanese consumers are largely sticking to shorter-term hedging, dealers say, as they are caught between expectations for rising oil prices when the global economy emerges from the current slump and a lack of confidence in such an outlook.
While the downside risk to oil prices appears to be more limited than other commodities, given the aggressive cuts in output by suppliers, its upside has also been capped by the uncertainty over the prospect of global economic recovery.
A murky outlook has led to an unusually wide spread between the front and longer-term oil contracts, leaving consumers wondering whether near-term contracts are priced too low or not and making their hedging decisions cautious, traders say.
While the front-month contract is pushed lower by the physical market prices, longer-term contracts out to about a year have stayed relatively stable at around $60-$70 even when oil prices were sinking, traders said.
A steeper contango pushes up hedging costs as they are decided based on options and swaps covering the hedging period. If current market price is below the hedging cost, the customers have to pay the difference to the securities firms which provide the hedges.
From niche ski resorts to major refineries, Japanese corporates have never been aggressive about locking in their future energy costs, leaving many exposed last year when oil roared to a record near $150 a barrel.
While relieved to see prices collapse in the months after that, most have been reluctant as yet to bet that this is the market bottom, or have been thwarted by the high cost or difficult access to hedging caused by a credit crisis that froze lending -- and credit lines -- for big and small firms alike.
Now that the freeze is beginning to thaw and prices are showing signs of stabilising around $40 to $50 a barrel, some are once again testing the waters of risk management -- cautiously.
"Demand is rising only in short-term hedging of less than a year, as hedging costs have come down a lot lower than levels previously thought," said Shun Ohashi, an assistant manager in the energy market team at Sumitomo Corporation.
"Some who had not been able to buy hedges before are coming in because prices have fallen, while others are considering procuring hedging," said Ohashi.
Still, risk managers say the combination of still-volatile oil prices and a deeply uncertain economic outlook are keeping most big players on the sidelines.
At the same time, it is a bigger challenge to find a bank ready to take on a big chunk of business, as the financial crisis has taken a toll of foreign banks such as Citigroup and Goldman Sachs major providers of risk services globally.
Countering this effect, however, is the fact that those banks often have decades of experience in the sector, while most domestic players have been in the business a few years or less.
"In order to get the same amount of hedging as before, customers must tap more firms, but the number of players that can offer hedging has dwindled," said Tatsufumi Okoshi, senior economist in the commodities research at Nomura Securities.
"There are some moves to boost hedging ratios by those who had stayed away when high oil prices had made hedging risky."
The head of Nomura's domestic commodities team, which was formed only a year ago, said last month he hoped to double its business by year's end.
BIG TO SMALL
Consumers' hedging demand typically grows when they want to guard against future price rises in commodities they consume, but the sharp drop in oil prices from a record near $150 just half a year ago makes current costs reasonable, traders say.
"We see demand not only from transportation firms but trading houses and a wide range of private-sector firms which need to carry oil for their factories," said a dealer at a European securities firm.
Japanese consumers are largely sticking to shorter-term hedging, dealers say, as they are caught between expectations for rising oil prices when the global economy emerges from the current slump and a lack of confidence in such an outlook.
While the downside risk to oil prices appears to be more limited than other commodities, given the aggressive cuts in output by suppliers, its upside has also been capped by the uncertainty over the prospect of global economic recovery.
A murky outlook has led to an unusually wide spread between the front and longer-term oil contracts, leaving consumers wondering whether near-term contracts are priced too low or not and making their hedging decisions cautious, traders say.
While the front-month contract is pushed lower by the physical market prices, longer-term contracts out to about a year have stayed relatively stable at around $60-$70 even when oil prices were sinking, traders said.
A steeper contango pushes up hedging costs as they are decided based on options and swaps covering the hedging period. If current market price is below the hedging cost, the customers have to pay the difference to the securities firms which provide the hedges.
