We have seen it coming for some time now, we knew that many of the big banks were making plans to reduce their footprint in the commodities markets thanks to increasing regulatory pressure. The banks used to be big consumers of Energy Trading and Risk Management (ETRM) systems and services. In the ETRM space we have seen projects and consulting assignments at many of the banks start to shrink and many of the ETRM related employees at the banks have been looking for greener pastures elsewhere. It should come as no surprise that on April 23rd Reuters reported that trade houses are claiming that Regulation, and less risk capital have reduced liquidity in the commodities market. (Reuters, 2015)
The reduced liquidity may not be completely because of the exodus of the banks but there are reports that there is now less commodity market hedging going on than in the recent past. With low oil prices some producers are indeed hedging less. This should not be a surprise given that many individuals in the Oil and Gas sector are promoting the idea that we have already hit the bottom for oil prices and that pricing should only be increasing from this point forward. The idea that we have already hit bottom with oil prices may be wishful thinking on the part of market participants; however, if the majority of the players in the industry have that sentiment then management of the production companies may be asking themselves “Why would I want to lock in at these low prices?”
It has been said that when speculators are active in a market it can have a stabilizing effect on that market. When there are fewer speculators around there will be reduced liquidity in general prices. As liquidity leaves the energy market, that market could become more vulnerable to price swings. Will we be seeing increased volatility in oil pricing thanks to the exodus of the banks? Perhaps. We do know that in trading volatility can be our friend, as increased volatility often results in more trading activity and greater margins if the firms are positioned correctly. Greater trading activity has often had a correlation with the amount of ETRM systems and services consumed. If the volatility occurs let’s look to see if an increase in ETRM services and systems sales also follows. Who knows, it may soon get even harder to find that ETRM expert that your organization requires.
- On May 5, 2015