New Year, New Risks: What risks are “top of mind” for risk practitioners in 2024 – Commodity Risk & Finance 2024

HOWARD WALPER, CEO AMERICAS AT COMMODITIES PEOPLE

Hello all.

Welcome to our commodity Trading Week online focus month series of webinars. I'm Howard Walper, CEO, Americas for commodities people. We've got a fantastic series of programs lined up today, so thank you very much for joining us. First up, we have a great group of risk experts talking about what's top of mind for them as we enter the brave new world of 2024. After that, our next webinar will be focused on the technology shaping and being shaped by changes in the commodity risk landscape and risk function. And we'll finish the day off with an outlook for trade finance in 2024. But before we get started, as always, a few housekeeping points. First, thank you very much to our sponsors for making this all possible. Your participation is deeply appreciated. Second, we've got a lot of folks joining from all over the world, from all over the world. So we would love to have you all out there in the audience participate in this discussion. So you'll notice at the bottom of your screen there's a little q and a box. So please enter any questions that you have in and we'll try to get to as many of those as possible throughout the event. And finally, this webinar is just a taste of some of the things we cover at our commodity Trading Week series of conferences now, where we bring together representatives from the entire trade lifecycle to discuss issues impacting markets and how different companies are adapting to these changes. So if you're involved in trading risk, trade finance, sustainability, procurement, trading digitalization, any of those types of things, please do check out website commoditytradingweek.com to see what's happening at our events in Asia, in the UK and in the US. And just to let you know, our first asian event will be taking place in Singapore next week, January 24 and 25th. I'm very excited to be out there for that one. Our UK event will be taking place in London April 23 and 24th, and our US event will be taking place in Stanford, Connecticut, June 5 and June 6. And with that, I'm pleased to turn the floor over to my good friend and longtime industry veteran who'll be moderating this morning, Glenn Labhart, the principal at Labhart Consulting. So Glenn, the floor is yours, sir, and I'm going to bump off and.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Thank you, Howard. Good morning, everyone. I would like to welcome you to the webinar and introduce our panel. I think we have a really good panel this morning that's going to cover a variety of topics on the new year. The new risk, what risks are top of the mind for risk practitioners. And so let me introduce, as you're seeing from the screen, Brock Mosovskyi, who is one of the co-founders and is the vp of analytics for Sequant. They're one of the more prominent analytical companies in the industry, have been around for a couple of years and have really made a splash with a lot of the industry. Jed Orr, I'd like to introduce, who is a risk manager for Mars, which is a global petrochemical resin and energy metals. He's also an active professor at NYU in the engineering division. Sean Britton, who is the head of risk and compliance at Musket Corporation, which is part of the loves companies. If you're in the United States and you're perhaps in a truck stop or somewhere, they have a massive presence in the United States and refined products as well as an international presence. Eric Twombly, my good friend, who is the credit risk manager at Global Golden Pass LNG, excuse me, Eric, who handles quite a bit of the risk for them as they're developing their terminal, which will be one of the larger terminals in the Gulf coast as it moves ahead and comes on stream. So with that, let's jump into it. And I'm going to throw out my first question here. Judd, I'm going to start with you. We're going to talk a little bit here about the economy. How high are these rates? We've got a little bit of an interesting dynamic in the industry right now where we've got a little bit of an inflationary circumstance, a resurgence or reemerging of risk and recession impacting the markets. Let's say you, how do you feel about something like that right now?

JUDD ORR, COMMODITY PRICE RISK MANAGEMENT AT MARS

Well, there's a lot to say about it, I guess, as we were discussing before this call started, markets calling rates to come down, but everyone is looking at the Fed with bated breath, let's say every single meeting, exchange, whatever any of the Fed presidents say. I feel like between now and March or June or whenever things kick off or are expected to kick off, I think everyone's going to be analyzing every single word. And if something is said that maybe you're expecting a Fed governor to say could instead of should, that might kick off some volatility, not only in rates and FX, but could filter down into the commodity space as well.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Okay, thank you. Sean. Do you have a comment ?

SEAN BRITTON, MUSKET CORP

Yeah, I think one of the things that we look at from a risk perspective, when you have high notional values, high volatility, high interest rates, money is expensive, how is that affecting liquidity, especially in the exchange traded markets. If you've got folks that are affected by potentially margin multipliers coming from some of the banks and fcms, that maybe their risk tolerance has shifted over the last couple of years, maybe people are pulling out of some of those exchange traded markets, and then with that lower liquidity, you have increased volatility. So it's kind of this vicious cycle that can really disrupt things for a lot of folks.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Do you feel there's a high degree of influence more in the exchange traded markets versus just regular cash markets or any of the derivative markets as well? Is it more concentrated in one area versus the other?

SEAN BRITTON, MUSKET CORP

Yeah, from what I've seen, I think it's affected the exchange traded derivatives a lot, and it's driven some participants over to the OTC side. On the physical cash side, Eric might have a good sense of know, the high interest rates, high notional values. How is that affecting credit risk? Sure, it's definitely a consideration.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Take that one and toss it to you then, Eric. I'll let you run from that one.

ERIC TWOMBLY, CREDIT RISK MANAGER AT GOLDEN PASS LNG

Sure. Well, I think the market has been expecting somewhat of an Armageddon, especially for speculative grade issuers. We have a cliff of about $1.9 trillion of speculative grade credit or bonds, which are coming due over the next few years, which is a record as far as the refinancing requirements in the speculative grade market. And S & P and Moody's both feel like default rates are, you know, instead of what was thought to be a huge maturity and refinancing cliff, what's actually happened, I think, in the marketplace is a lot of that has been pushed further down the pipeline. So we see the ability of speculative grade issuers to refinance that debt at much higher rates. And so sort of pushing down any potential default requirements further out into the future as those entities are able to refinance, but then perhaps not generate enough cash flow to support that debt in the future. And we've been lucky with regards to market volatility before this winter storm that came through. But we've definitely seen lower volatility and lower market prices, particularly in the US gas market. That's been beneficial to OTC credit. But there's certainly a push to try to rationalize margin by doing more OTC credit rather than credit through exchanges, which is, I think to your point, a bit of a reversal of previous years where a lot more business has moved to exchanges and cleared type of arrangements to reduce credit risk generally, and particularly for longer term transactions.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Very good. I would agree with this on the interest rates that we're probably going to see a reduction. How much? I mean, you know, the industry is looking for one to three for next year's points, maybe one or three times a year. Personally, I think now as we're heading into this year, I think interest rates are first and foremost to a lot of people because Eric, I think hit the nail on the head. You've had a lot of investment activity, a lot of notional credit that needs to be refinanced. Whether or not it can be made up in a shortfall from cash is going to basically be able to generate a cloud over the market to some extent to new deals that can be done and factored in. And how you're going to factor in some of these rates into some of these proposed transactions of M A or even inventory financing. There's no question that in the last year or so when we've had the conflicts, you've shifted the market trends around. A lot of people that from a trading perspective have modeling on their books, they've got a heavy influence of interest rates that are going to shift their portfolios around. And so I think as you head into 24, it's very much a micro set of circumstances that people are going to have to take into consideration as they start putting out year end earnings, first quarter earnings, and start to look at some of what they're going to look like to the rest of the industry. So there's a lot of moving parts here. I think that a lot of people have taken very good, constructive views of the market of their own portfolios to be able to handle this. But the jury is still out as far as how much these rates are going to move everybody around a little bit. Let's shift gears a little bit and let's talk about some more of the geopolitics and what's going to impact some of these commodity markets. There's a lot of things in the industry that have been what I call kind of in progress, finished goods type of views in an industry. And some of these things are going to start rearing their head here in the next few years. And so I'm going to ask Brock to address some of these areas of some of these new risks that we're going to be facing. Then we'll take the discussion from.

BROCK MOSOVSKY, CO-FOUNDER AND VP, ANALYTICS AT CQUANT.IO

Yeah, you know, when we think about how geopolitics can work its way into commodities markets and particularly energy markets, I think we really saw that come about in kind of late 2021 with the war in Ukraine, followed by kind of the global gas supply shortage. That was really prompted by inaccessibility of Russian gas through that conflict. And so what we saw is a global, we really saw the global nature of the natural gas markets. We saw how they were linked with LNG, and we saw the ripple effects of the gas supply shortage through power markets, even as far as California, even though it was kind of a European phenomenon. We saw massive increases in gas prices across the US and we saw the corresponding impact on power prices due to the strong correlation between natural gas and power. And so I think it now, when we look at how our clients experienced that event, we saw value at risk numbers shoot through the roof. We saw increased hesitation to go out and transact, especially to buy, because we felt we were at the top of the market. And it really had ripple effects through risk management and through portfolio management because of those kinds of knock on effects of geopolitics. So now with the Israel Hamas war and the other conflicts in the world, I think it's sparked a renewed sense of how some of those geopolitical situations can very directly impact financial markets and particularly energy markets.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Jed, let's talk about your thoughts on that one. On geopolitics. What can you offer to us?

JUDD ORR, COMMODITY PRICE RISK MANAGEMENT AT MARS

It's really, it will be interesting to see how, first of all, it's an election year, but I'm not going to really touch on now. It'll be interesting to see how long OPEC can keep this up. I mean, it's really the Saudis who are pushing for this voluntary cut. And even though Brazil is in now, but not really doing any cuts, it'll be interesting to see if those dynamics change. Take that into the know. As you know, Ukraine, Russia and the Red Sea conflict and all that stuff like Israel, Hamas and the Red Sea conflict, like getting physical products around the globe is an issue. Another point that's interesting is that the ag space is a little cheaper than it was during that initial Russia Ukraine conflict. So you wonder if other major companies, not companies, other countries or entities are going to come in, when's China going to step in and buy corn or beans or whatever? So there's a lot to think about.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Sean, how about you? You've got an international presence. How's this affecting what your outcome or your thoughts are?

SEAN BRITTON, MUSKET CORP

Yeah, I think I would mirror a lot of what, or kind of echo a lot of what Brock was saying. And I think a lot of the things he mentioned for the gas and power markets are also true in the oil and products markets. I think any risk function should certainly be looking at the global supply and demand fundamentals because you cannot just look at the markets that you may be active in locally because of all this interconnectedness. I think a lot of the events over the last three or four years have really highlighted the fact that all of these markets and all of these commodities are interconnected. And there's a lot of things that can happen in one part of the world that will ultimately have secondary tertiary knock on effects elsewhere. I think if you look at the value of freight rates and the volatility associated with those and how that spiked over the last couple of years, I think there's a lot going on there that people maybe in the past had been focused more locally. I think you definitely need to have a global view of things for an effective risk management function.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Absolutely, Eric.

ERIC TWOMBLY, CREDIT RISK MANAGER AT GOLDEN PASS LNG

Yeah, well, I was just going to say with regards to geopolitical events, they can be sort of black swan type of events. I mean, we looked at, as was mentioned, the exit of Russian gas from the market and the effects that that might have. Not that I think it's likely, but the possibility that Russia and Ukraine find a peaceful solution and Russian gas comes back on the market. Again, not a likely scenario, but one of those black swan events that you sort of need to consider when you're doing scenario analysis and how that impacts the market and individual counterparties. And I would go to just touch on without any commentary on the US elections that are happening this year. I think that regulatory change is a big issue for a lot of individual counterparties and the market. And to the extent which way the administration goes, particularly the presidential executive branch, could have a big impact on the regulatory environment, which would have a major impact for a lot of energy projects, particularly in the US, renewables types of projects. So certainly as an investor and even as a credit risk manager, you need to be thinking about those knock on impacts as we get closer to November.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Yeah, that's a really good point. I think we talk about the global sets of circumstances and geopolitics. I think Sean made a good point. You've got to watch the whole world. Makes me wonder how big everybody's variance covariance matrix are or turns as they're running their risk profiles. You've got to stay focused always on what is applicable to your business, whether it be micro or how much macro do you really put into that? Sean, I'm going to flip it back to you for a minute. How do you balance that a little bit? I mean, you've got an international group that you're watching. I know your core business here, but have you had to build more scenarios or enhance those scenarios? Can you give us a little more color on that?

SEAN BRITTON, MUSKET CORP

Yeah, we have had to kind of expand our scope and our view on things, but I think it goes hand in hand with the kind of commercial expansion we added the desk in Geneva within the last year or so and that helps give us additional visibility to those markets. Having a presence in the market certainly adds visibility that you can't get just by watching prices on the screen or reading headlines. And so that to me really highlights the importance of having your risk function set up and positioned as a partner with your commercial trading operation. I think having the back and forth between those where they can benefit one another is incredibly important.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

I would agree with that and appreciate your taking that extra time to give us that. Know, when you look at the geopolitics of this, you look at, I think, what happened overseas here, not in the Middle east, but really in know with the ukrainian situation, you had a lot of host governments step in and take control of a lot of their energy functions, supply everything to the downstream. And now you've got an RFP process in Europe that is developing what I call the European Henry hub where you have Regas facilities and people are bidding and then delivering underneath these sorts of things. So you've developed a market and there's of course a lot of effort. I know that the CCRO has put out an arrangement to try and develop a LNG type marker with one of the exchanges. I think everybody's just going to see how that plays itself out. But you're starting to see the market grow. You're also starting to see a lot more new players in the market. So I think you'll see as investments have been made pretty much in the upstream part of the market, you've got the permian basin controlled by some very big hitters out here. A lot of the things that have happened already that are acquisitions or M and A activities that are now starting to execute into 2024, a lot of these cost reductions are going to start taking place and a lot of people are going to start shifting their areas to more of a global marketplace. I mean, you look at right now, more and more people are starting to develop offices into the Singapore market, no question. I think to echo what Sean is saying, if you're not there, it's hard to be a part of that. It's a number, but you've got to have a little bit more of a number to be able to compete. Some of the micro circumstances are really very important. Certainly shipping is going to become even more important. We're starting to see people deviate and go around the Cape right now on a lot of the LNG vessels because of some of the problems in the Red Sea, although there's not a lot moving from there. It's just changed the way we think about everything every day. Every day is a new day and you're trying to massage, I think, a lot of numbers. And so it's a real critical thought process for a lot of people. Brock, in your line of work, because you handle a lot of the new markets, how has this changed your thought, being a software provider in a lot of your models, how much has this altered for what you're looking at?

BROCK MOSOVSKY, CO-FOUNDER AND VP, ANALYTICS AT CQUANT.IO

Well, it's an ongoing challenge being an analytics provider and providing analytical tools to do asset valuation and risk management and portfolio management. We have to make sure that our solutions are keeping pace with all of these changes. Right. And Sean mentioned some of the regulatory changes. Comment on that. I think we're seeing a lot of those across the power markets, and one that comes to mind specifically for this year is in California, the emergence of slice of day resource adequacy, which is being implemented. I think it's, this year is going to be the test year and then it's kind of going live as a full regulatory compliance mechanism next year. So that has anyone with load serving obligations looking at their portfolio in a completely different way, which requires completely different analytics, but also completely new markets. Right. You have this emergence of an hourly focus of capacity adequacy or resource adequacy in California. And that's going to create markets for renewable energy credits at the hourly level. It's going to create hourly resource adequacy markets. It's going to completely shake up the risk management space and the portfolio management space and create new products. And so that's something that, again, as an analytics provider, we work very hard to stay at the leading edge of that. But it's got a lot of people asking questions for sure.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Is it exclusive in California as you speak, or does it translate over into the US or are other markets behind it? Can you give us a little bit of a color, kind of, at least in the US space, as to where the priorities lie or the emergence of other markets?

HOWARD WALPER, CEO AMERICAS AT COMMODITIES PEOPLE

It's great. Can I provide some speculation that's well informed from history. California tends to be a front runner in a lot of things when it comes to renewable energy. But we do see across the US and really globally, this emergence of sustainability focus within organizations, whether they're energy focused organizations or other organizations looking to kind of increase their sustainability. And what that's doing is it's becoming more and more localized in space and in time. And so when we look at carbon offsets, when we look at tracking carbon within portfolios, we're starting to consider local marginal carbon, right? Almost like there's a local marginal power price. And when we look at it, at least from the standpoint of energy production. And so that is a phenomenon that is hyper granular in both space and time right now, it's primarily being driven by large corporations. Microsoft, Google, Amazon have kind of been pretty vocal about looking at matching their renewable supply to their demand in location and in time. But again, that's creating these new products. There's a demand for renewable energy and credits at a particular point on the grid and at a particular time, and it's creating these new markets. So I think it's something that will eventually spread. And we're already seeing it on the carbon side. We have a precedent for it in power pricing with the local marginal power prices that are implemented across the RTO markets. And so I think we will continue to see that. But it's anybody's guess how that's going to look when it's adopted by the PJM, interconnect or ERCOT or other nations around the world.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Yeah, we were talking about this before, I think, amongst ourselves, where a lot of the fundamentals have just kind of enhanced themselves over time. We've always had these things like you say, the LMP pricing and other energy pricing mechanisms. It's an evolution and we've certainly learned from that. Just to the panel, and I'll just let everybody answer with the Inflation Reduction Act, is this bringing new products, new players, new requirements, and are all the people equipped to be able to handle that? Sean, you want to take a stab at that one? That'd be good for you.

SEAN BRITTON, MUSKET CORP

I don't know how much I have to offer on that one, unfortunately.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Okay, Brock, I'll throw it back to you. What do you personally, I will say this, I'll answer it myself. I feel that I have a great concern that there's a lot of components going into the investment cycle of capital that's being invested through the Inflation Reduction act. We all know the numbers, we all know the credits. We can all do the math. Now it's a matter of whether people have the capability of some smaller structured circumstances to be able to execute according to some of these plans and some of the risk management requirements that they're going to have. I mean, that's my view. I have a very big concern about it that we're putting new people in. But have they gone to the trouble of being able to facilitate putting in checks and balances of risk management properly? I'll let you take that one.

BROCK MOSOVSKY, CO-FOUNDER AND VP, ANALYTICS AT CQUANT.IO

I think you hit the nail on the head. We're definitely seeing a flood of new market entrants because of the IRA, because of now the ability for standalone batteries to access IRA benefits and just the increased certainty we can talk about the political regime change and the possibility for repeal of that act. But right now, and over the last couple of years, there's been a flood of new entrants. And a lot of these are organizations that are seeing dollar signs and want to kind of partake in what the IRA has to offer, but don't necessarily have the depth of experience. They're just starting out. Right? They're starting out. They're starting up. And I think that they're inherently making a lot of long term commitments that are going to be on their balance sheet for a long time.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Right.

BROCK MOSOVSKY, CO-FOUNDER AND VP, ANALYTICS AT CQUANT.IO

They may not fully recognize how to build a portfolio in a strategic way, and I think that's something that needs to be a focus from a risk management standpoint.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Well, I think energy has always been in a cycle of invested capital, which may run five to ten, maybe more years to get to the obligation. Yet you've always had to manage risk in the short term. Eric, you've been in this business a while. Do you have some comments on this as it relates from a credit or just a market risk or just in the risk climate, what you think we're going to be faced with?

ERIC TWOMBLY, CREDIT RISK MANAGER AT GOLDEN PASS LNG

Sure. Well, you mentioned the development of new products will certainly be a challenge for managing a lot of these rtos. And fortunately, the rtos have lately come around to increasing the sophistication of their counterparty assessments and credit risk management, because we saw with green hat what happens when you have undercapitalized speculators working in some of these markets and the volatility of some of the particular products. So certainly more rigor is needed. And I think the rtos have largely recognized this and are moving in that direction. So that's certainly positive. But for the rest of the market, it's also sort of a warning for counterparties generally. And I think Brock pointed it out pretty well, that a lot of these long term contracts require more sophisticated analysis. And certainly on the counterparty side, because you're essentially moving market risk into a counterparty risk realm. And you definitely need more careful tools or more careful analysis to make better risk adjusted decisions.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

So when you're making the longer term capital type circumstances, Sean, what are you looking at? What do you go through in your head to do that? Do you just take and throw it into the book, or do you have a separate process? How do you do something like that?

SEAN BRITTON, MUSKET CORP

Yeah, I mean, a little of both. Honestly, I think, like I mentioned earlier, taking that kind of holistic view of things, looking at big picture, going back to your question on the regulatory front and some of Brock's comments, I think you have things in the market like the EPA's RVO or the California Washington, their low carbon fuel standards and clean fuel standards things. The regulatory dynamics there certainly impact the supply and demand fundamentals and the price action on a lot of those things, which then will drive things like refined products and those prices. So I think the regulatory landscape is certainly something that trading companies need to be looking at from a long term investment point of view. My focus is much more on the trading side, so I don't have as much to add on that front, unfortunately.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

That's all good. Let's shift it from long term capital real quick. Over to you, Judd. Let's talk about volatility. As we talked about, you got the long term here that you're faced with going through looking at a capital structure, but the shorter term volatility. Talk to us a little bit about how you see volatility and whether or not it's an offensive or defensive move and how you handle something like that.

JUDD ORR, COMMODITY PRICE RISK MANAGEMENT AT MARS

Yeah, I mean, great question. What really comes to mind is the baseball quote, hit it where they ain't. I think we're like 27, 28 days out till pitchers and catchers report, so hopefully that's fitting. But it really does come down to not just when you're looking at the forward curves or structures like that, trying to see where it makes sense to buy or sell, get coverage on calls, put whatever you want to call it, or different exotic structures. It can be a challenge at times, but there are interesting opportunities, like what happened a couple of weeks ago, or at least the latest move lower in that gas. You saw parts of the curve that are probably like, let's say, next winter getting shaded towards the put, like getting pulled down with the front part of the market. And that gives an opportunity to maybe get some better coverage should things turn around. I mean, I'm not necessarily a fundamentalist, but hey, a lot can happen between now and next winter. So it's worth looking at.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Are the techniques in the market right? Are we using the right techniques? I'm not going to ask you to reach into your bag of tricks. You don't have to give all your disclosures, but we can throw that around for everybody's discussion here. Do we have the right techniques? What are we looking at here that makes sense to us as we're looking at risk?

JUDD ORR, COMMODITY PRICE RISK MANAGEMENT AT MARS

I'll kick it off. That's a great question. And we're always trying to add tools where we can and where they make sense for the business. I sit in a unique space as a trader hedger, but also working for an end user company. I mean, we make Snickers and I'm pet food, not necessarily investing in assets or moving products around. So it really comes down to building out the toolbox and really listening to our customers and then trying to work backwards and say what products or what risk types or products can we use to get to the end result? That.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Me. Brock, go ahead.

BROCK MOSOVSKY, CO-FOUNDER AND VP, ANALYTICS AT CQUANT.IO

Yeah, I can comment from an analytics perspective. What we're seeing in the marketplace, really, I think one of the shifts is that maybe 510 years ago, we were seeing many more organizations manage a lot of their positions within kind of silos, especially on the renewable energy front. So I buy a renewable asset and I hedge that asset, and then I move on and I do it again. I buy a renewable asset, I hedge that asset, whether it's with a power purchase agreement to secure offtake, or whether it's with an active trading strategy. I think now many organizations have built portfolios of renewable energy, other energy positions, other commodities positions, and they're starting to now realize that there's a significant benefit to be had in looking at things more holistically. We're looking at things at a portfolio level instead of an individual asset or deal level, and hedging the portfolio rather than hedging individual deals. And when you do that, what you realize is that not all volatility is bad. Right. To tie it back to the volatility question, it's really a matter of diversification and it's a matter of offsetting positions, and it's a matter of analyzing the covariance between the movement of the underlying prices or the market indicators or the futures contracts. Right. And how do those things come, and how can you construct a portfolio that is optimally diversified so that you actually have to minimize your active hedging? That it just kind of hedges itself. And that's something that we're seeing a lot of our customers kind of acknowledge now, whereas that was something we were trying to kind of preach five to ten years ago, and only the really big players were receptive to that. So I think that's a trend in the right direction.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Thanks, Sean. You've got a big portfolio. What kind of stuff are you using?

SEAN BRITTON, MUSKET CORP

Yeah, I think not to get too into the weeds, but some of Brock's comments really hit the nail on the head. Know, looking at things from that kind of holistic portfolio view, and as a risk manager, wanting to have the right people, processes, tools in place to be as proactive as possible. Obviously, if I had a crystal ball, I would probably have a very different job. But you can't be completely reactive. You need to be as proactive as possible. And I think hopefully our organizations have all not learned too many lessons the hard way, though certainly there are market participants out there that have. And I think the risk function is being as proactive as possible. And all the things that we've talked about today, with the interconnectedness, the increased volatility, the high interest rates and high notional values, all of it is a unique set of challenges for a risk management function. And I think the notion of the black swan, in my opinion, it seems like they're not as black as they used to be. I feel like these events keep happening. There's more and more what we would consider to be black swan events. It seems like they're happening with increased frequency. And these cycles that we see in energy and commodities feel like they're getting a lot quicker. It feels like those cycles are happening and turning over with a much faster rate than maybe they used to.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Yeah, one of the things I think in risk management, we all would agree, it's always about the cash and watching the cash. Second thing is watching the risk transfer and watching risk aggregation, long term transactions, shorter term transactions that are managed. I think it's apparent that in the industry, depending upon how large you are, it's a matter of the kind of people, processes and system, making sure that all known risks are in the portfolio. And you try to minimize anything outside of the natural system of record. Everybody's got something outside. If anybody's not got that, that's listening here or anybody, all of us on here, we know that exists. You can't get everything into the perfect system, but you've got to maintain a sense of order, of always having. Where is that cash flow coming from? What's the risk of that cash flow? Making sure you have that technique and that there's a level of communication and understanding. And certainly I've talked about this a little bit before we were visiting. There's been a lot of surveys out here about CROs and so forth. Most people really, I think what was interesting is the comments were made that they're more focused on maintaining the level of communication and adequacy of information to the regulators, which tells you people have moved down the field a little bit more. We've certainly seen issues in the market, but everybody's maintaining that sense of orders because you never know when an adverse effect like a storm, Uri, that you've had down here in the south or what you've recently had in the northeast or somewhere else, you're always going to have these events occur. And when these events occur, everybody's got to be ready to go. And not trying to say, we don't have that deal in the system properly. It's a matter of managing it, making sure it's well communicated, and that risk management always has the top. And you create an aura of a risk culture within your organization that everybody's a risk manager, first line of defense to the level of defense on the back end. So those types of things I think are very important. One of the questions coming in I'm going to kind of close with, which was kind of one we already had, but I'll start with Brock. What's the biggest risk or challenge that the industry or just yourself is facing in 2024?

BROCK MOSOVSKY, CO-FOUNDER AND VP, ANALYTICS AT CQUANT.IO

Oh, boy. I have to only pick one. It's a good question. We work really across commodities, but we certainly do concentrate in the electricity and gas space. A lot of our customers are load serving entities or independent power producers or trading shops or corporate buyers of renewable energy. Right. And I think that some of the big risks that they are starting to grapple with, and it kind of goes back to the recent discussion around some of the black swan events, the evolving climate dynamic, and how all those things fit together. Because risk management is not anymore just about the cash. I mean, at the end of the day, it's all about the cash. But there's multiple different attributes within the portfolio. You have your power position, you might have a natural gas position, you may have other commodity positions, but you now also have positions and obligations in renewable energy certificates, in carbon free allowances, which are a little bit different in reggie, in resource adequacy, there's a multitude of different positions that all must be simultaneously managed. And there's supply and demand for every single one of those within the portfolio. And so that complexity, I think as we start to see more organizations move deeper into their sustainability journey, as we start to see the regulatory landscape evolve, as everything is decentralizing to finer and finer granularity, what we see is that those are things that are front of mind for a lot of organizations connected to the commodities space to be able to manage all of those things simultaneously. So that's kind of one of the biggest areas of focus from my perspective for 24.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Sean, what about you? Biggest risk for 24?

SEAN BRITTON, MUSKET CORP

I think for me, it's a combination of factors where I think for any risk practitioner staying abreast of the growth in your commercial organization, as well as the continued changes in the market landscape, we've got, I think specific to the fuels market, I think there's a lot of changes in the market. And those dynamics, I think the regulatory landscape is very active and dynamic. I think just making sure that we have the correct people, processes and tools in place to stay abreast of both our own growth as well as market shifts and changes in market dynamics. It's quite a lot to grapple with.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Absolutely.

JUDD ORR, COMMODITY PRICE RISK MANAGEMENT AT MARS

Judd, biggest, I mean, I have to say that it's probably the economy, even though it's mostly on the back burner or right now, it's kind of assumed that rates will decrease. But what if they don't? And how does that play into the consumer for a company like Mars? That's really where it matters. And when we're thinking about from a risk management perspective, what do they want us to get? Do our consumers want us to get super granular on some of the climate initiatives and some of the other wrecks and so on and so forth? Or is it something where we just kind of blanket everything and try to make it kind of a one size fits all? So it's really economy and consumer driven?

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Yeah, from my end, I would say this. I think that I've been in the industry for a while now. I started in this industry 1979, and am very proud to have been touched by all the different commodities and worked with a lot of really much smarter people than me. But my observation is I've always felt that energy has gone to the trouble of doing good research, good analysis, good upfront capital requirements to be able to ascertain how much risk that they're really going to manage across the barrel or across the molecule or whatever you want to call it. And my biggest concern for the next year is a lot of the geopolitics and more or less, really a lot of the politics that we have here in the states, because there's been some discussion between politics of what's going to happen next year, changes that might affect some of the climate change circumstances that have been already put in place, what this is going to do, because, let's face it, we've all got power right now with what we're operating on. We all drove our cars yesterday or today. We're all looking at the means of a system that works. And those that are making it work are people that have invested capital into the market to make sure these things happen and manage their risk accordingly. And when a regulated agency or a government changes the scope of that, to me that's a big change, because you can't undo a five or ten year capital commitment. And some of the regulatory things that have been on there, and certainly an inflation reduction act, I think is a good idea for the future. But you've already got a lot of capital that's already been invested, and you can't take this little slice and just turn it inside out to the rest of the market. And that's the biggest concern that I have, is that there is a recognition or an acknowledgment that the larger capital structure that you all operate under and work with is not going to be overshadowed by one small piece of legislation. For something that's been working for a long time. It's always working. And it's maybe not the greatest thing for fossil fuels, and that's a separate argument. But from a capital perspective and how things are getting done, I think to contest some of those things is a very dangerous set of circumstances, and I hope that that will kind of work itself out. I want to thank the panel for their time. I want to thank everybody for the time you've given today. Those that have been on here, we got all the questions answered.

SEAN BRITTON, MUSKET CORP

There is one left.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

We'll answer that one directly. I want to wish everybody a pleasant 2024 from your risk perspective, your business perspective, and your personal perspective. And thank you for attending our conference today. On behalf of risk and all the sponsors, thank you very much for being a part of this and wish you a pleasant day.

HOWARD WALPER, CEO AMERICAS AT COMMODITIES PEOPLE

Thank you, everyone.

JUDD ORR, COMMODITY PRICE RISK MANAGEMENT AT MARS

Thank you, everyone.

GLENN LABHART, PARTNER AT LABHART RISK ADVISORS

Take care. Bye.