A Year in Review – 4 – The Changing face of Energy Trading
2012 was a year that caused more questions than answers for energy traders. It’s fair to say that the full consequences of tighter regulations on the trading side and the constant inflationary pressure on the production side have yet to be determined.
However many believe it could mean a significant shake up, leading to a restructuring of the energy landscape in the New Year. Below is a look back at some of the top trends and issues for 2012.
Exodus of Traders from Banks
One notable trend that is on the up from previous years has been the steady exodus by top traders from banking institutions to merchants and hedge funds. Ten years ago, major banking institutions were lining up for their slice of commodities trading pie. Attracted by the boom in resource markets, their aim was to grow aggressively. However, since the 2008 credit crunch, many have been forced to bow out of the race or scale back and consolidate their operations. According to London-based Research Company Coalition, shrinking profits in both North America and Europe has caused commodities traders on both sides of the Atlantic to move to greener pastures.
Regulations Crack Down
Tighter regulations have also been more rigorously enforced on banking institutions in the US this year. The Federal Energy Regulatory Commission (FERC) has flexed its muscles on several occasions this year, applying some hefty fines onto some well known organizations.
In September, FERC issued a “show cause” order to US bank JP Morgan Chase and Co asking why it shouldn’t take the bank’s market-based rate authority for providing misleading information about its market trading in California. JP Morgan apologised.Back in March, FERC won a $245-million fine from Constellation Energy over charges of power market manipulation in-and-around New York.
Commodity Super Cycle Wanes
Moving on from the banks, speculation was rife this year that excessive investment has led to a flood of liquidity in the market. Many argue that the commodities super-cycle of the last decade could be over. If China slows down, and Europe, the US and Japan start to work their way through austerity measures, could 2013 be the year that over-supply sinks prices?
Graham Sharp, founder of commodities trading house Trafigura and an adviser at consultancy Oliver Wyman, said back in September that commodity trading was on the cusp of undergoing ‘its largest transformation in 30 years’. Commodities traders are now evolving their roles as buyers and sellers of raw materials to becoming an one-stop shop for investing in production, refining and logistics.
Smaller Traders Get Squeezed
With the emergence of the so-called “new order”, where major trading houses extend their dominance over the market; what does this mean for smaller and medium –sized traders? Well it might be a rocky road for them in 2013, as the cost of producing commodities (such as oil extraction) continues to increase and tougher regulations on derivatives are phased in.
These trading houses outperformed their smaller rivals in 2012 and with their superior ground level understanding of local commodity markets they could continue to outperform other market participants in 2013. It will be interesting to look back again in 12-months’ time and see whether or not the major trading houses have gained a firmer grip on becoming the dominant powerbrokers in our ever-changing energy landscape.
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