Rarely have organizations in the energy and commodity markets faced so many fundamental shifts in the economic sectors underlying their business. Not long ago, commercialized markets followed the perceived rule of supply and demand. For energy commodities such as power, natural gas, and coal, weather was a principal driver of demand, and hence price. However, in a world that is increasingly interconnected, once predictable pricing patterns are becoming more nuanced. Globally fungible commodities are extremely elastic and can display regional idiosyncrasies. Every company is competing in a global market, no matter how regional they think their customers are. Under these circumstances, access to a diverse stream of data and the ability to efficiently interpret it is more crucial than ever.
Exploration and production technologies have recently played a major role in driving market price, and this driver of change is accelerating. For example, the cost of solar power is reduced by 30% with each doubling of panel production capacity, and wind by 7.4%. We have seen what happened to the cost of gas with improvements in fracking technology. The laggards are coal and nuclear, with the latter actually seeing its costs rise. Utilities in particular will be challenged by attempting to manage this transition in the energy mix, as power generation continues to be the largest consumer of energy supplies, and substitution between coal, gas, and renewables occurs, particularly during peak demand. Utilities must have extremely advanced abilities to manage this data underlying their purchasing decisions.
Communications technologies have also consolidated the markets. With no limit in bandwidth, process speed, or data storage, analysts and traders using these technologies are now able to analyze, correlate, and forecast infinite intra-commodity relationships to maximize their profits on commodity transactions and take advantage of arbitrage opportunities without the constraints of geography or time zones. And with options such as Software as a Service (SaaS) available, hardware is also not a constraint for analysts and traders who must have access to all the data they require to make informed trade decisions. As 90% of all the data ever created has been created in the last two years, and a fiftyfold increase is expected by 2020 (IDC), it is not surprising that many traders’ worldviews have changed dramatically in the last few years. Markets can expect this global interconnectivity to intensify. As the global data repository grows exponentially, those who are able to quickly extract trends and key observations will experience market success—that is, the proverbial wheat pulled from the chaff (this is a favorite ag quote).
In May 2014’s in-depth article, Aiman El-Ramly and Bruce Colquhoun dive into exploring how ZEMA can help you in visualizing the connections that exist between all world commodity markets to recognize risks and opportunities more clearly.
To learn more about energy demand dynamics, click here for the full article: