Key takeaways
Hedging
This is one way in which traders seek to manage their financial exposure.
Contractual breach
The Iran conflict has led to cancellation of shipments due to force majeure or termination of sale contracts due to non-performance.
Hedging losses
In principle, these are recoverable subject to issues of causation, foreseeability and mitigation.
In June 2024, we published an article on recovering hedging losses in sale contract disputes: Recovering Hedging Losses in Commodities | Hill Dickinson. In that article, we explained the basics of hedging and how, based on English case law, damages should be computed by reference to hedging.
Context
Hedging is one way in which traders seek to manage their financial exposures. It is particularly relevant in times of heightened volatility, arising from unforeseen events that cause market disruption and economic uncertainty.
Oil prices dropped sharply following the outbreak of the Covid-19 pandemic, where demand and storage capacities fell significantly. But then oil prices, and particularly gas prices, rose dramatically after the Russian invasion of Ukraine. Where Ukraine had been a breadbasket for much of Europe and parts of northern Africa and the Middle East, agricultural crop prices surged.
It was reported that crude oil hedging nearly doubled in Q4 2022 whilst gas producers added 4.02 billion cubic feet per day in new hedges. Farmers and agricultural businesses hedged raw material inputs such as wheat, seeds and fertilizers to protect against price fluctuations that could potentially impact their production costs and profits.
As at time of writing, mid-March 2026, the world is experiencing a period of heightened geopolitical tension and political instability. The effect on global energy markets in circumstances where oil and gas prices have risen due to the Iran conflict and the resulting disruption to oil shipments through the Strait of Hormuz, has resulted in what is being reported as the largest oil supply disruption in history. The consequences include rapid and extreme fluctuations in commodities prices, including natural gas, oil, petrochemicals and precious metals. Freight rates for tankers operating in the Persian Gulf have gone through the roof. As a result, in early March 2026, there has been a major surge in crude oil hedging activity.
These volatile times require those engaged in commodities trading, finance and derivatives to manage risk exposures ever more closely.
Market turbulence creates trading opportunities of course. It has been reported in the trade press that several commodities-focused hedge funds posted strong returns in the second week of March 2026. At the same time, it was also reported that Asian oil refiners, particularly Japanese and Chinese refiners, faced significant losses due to the Middle East conflict.
Contractual default and hedging
Many participants in string contracts for the sale and purchase of oil and gas shipments have invoked contractual force majeure clauses leading to the automatic cancellation of shipments since the start of the Iran conflict. Others have sought to terminate for non-performance.
Not all supply chain disruptions and contractual non-performance or delayed performance will be excused by a force majeure defence. Where shipments relate to open origin goods (i.e. goods of a certain specification but of no defined origin) alternative sources of supply remain available to satisfy a contract which a seller may have wished to perform by shipping from a Persian Gulf port or terminal.
Consequently, damages claims are being pursued for breaches of contract and/or as a result of termination.
Where one or both parties have hedged to protect themselves against price fluctuations, delays in performance may adversely impact the traders’ paper transactions. It is usual for the physical and paper transactions to be aligned as closely as possible, including as to pricing periods.
If, for example, a trader has sold goods and bought futures that will mature in the month of performance, the trader may need to roll over the hedge to the following month if performance is delayed. Otherwise, there will be no hedge in place to protect against further price fluctuations up to the point of performance or termination. Rolling a hedge may ultimately result in greater paper losses if physical prices continue to rise.
Recovering hedging losses
Parties to sales contracts that suffer losses as a result of their counterparty’s contractual breach will seek to recover those losses, including any hedging losses.
Where the sale contract is governed by English law, the issue of whether or not hedging losses will be recoverable is likely to be fact specific and will depend on the circumstances of the case.
In an oil and gas context, the English High Court considered in Addax Ltd -v- Arcadia Petroleum Ltd & Anor [2000] 1 LR 493 that hedging was an 'integral part of the calculation of the net position' in respect of the loss in question. The English legal position in respect of hedging, as derived from caselaw in the following 25 years, can be generally stated as follows:
Where a trader enters into an external hedge which is closed out following a counterparty’s breach of contract, paper losses which accrue therefrom are recoverable if that counterparty would have been aware of the likelihood of the innocent party hedging to protect itself against risk (Choil Trading -v- Sahara Energy Resources Ltd [2010] EWHC 374). So, whilst hedging losses have to be foreseeable, the English Court recognises that sophisticated traders hedge and, indeed, are expected to hedge.
Where a trader matches buying and selling positions internally to chart risk across its entire trading book but does not place external hedges, that matching will not be brought into account when computing damages (Rhine Shipping DMCC -v- Vitol SA (The Dijilah) [2024] EWCA Civ 580).
Under English law, there is a duty to take reasonable steps to mitigate one’s losses. Failure to mitigate can lead to a reduction in damages awarded. Mitigation of loss could, for example, justify a post-breach hedge. Any and all attempts to mitigate should be documented and evidenced.
