The Changing Structure of Energy Trading Markets[†]

Energy trading markets have been undergoing radical transformation lately. These transformations are set to accelerate in 2013 because of much anticipated implementation of new rules that will govern global swaps markets.  These  include  measures  such  as  position  limits,  mandatory  clearing  and  margin  requirements,  capital  requirements,  pre-  and  post- trade  transparency  through  position  reporting  requirements  to  trade  repositories,  as  well  as trading  standardised  swaps  on  designated  contract  organisations or swap execution facilities where multiple traders can place bids and offers, and real time  reporting  of  cleared  and  uncleared  swaps  to  the  centralised  swap  data  repositories.  These  changing  dynamics  present  new  challenges  not  only  for  financial  speculators,  who  buy  or  sell  any  asset  in  the  anticipation of a price change, but also for traditional energy companies that use previously unregulated  financial derivative instruments to hedge or mitigate commercial risk.

Seeking Common Ground on Oil Market Drivers*

As part of their remit covering joint activities set out in the Cancun Ministerial declaration of March 2010, the IEA, IEF and OPEC jointly hosted their second annual workshop on linkages between physical and financial oil markets in Vienna on 29 November 2011. Over 100 participants attended from across the spectrum of research institutions, major oil producers and consumers, the financial sector, regulators and policy makers. Participants reviewed recent studies on commodity price formation, the role of price reporting agencies, developments in regulatory reform in the energy derivatives markets, and emerging issues and key challenges. A full joint report on the workshop will be provided to IEF Ministers ahead of their next meeting in Kuwait in March 2012. The following represents the IEA’s version of key take-aways from the Vienna event.

Commodities: No Longer an Asset Class in their Own Right?*

Investors, seeking to diversify their portfolio and hedge against rising inflation, have increased their exposure to commodities by directly purchasing commodities, by taking outright positions in commodity futures, or by acquiring stakes in exchange-traded commodity funds (ETFs) and in commodity index funds. This pattern has accelerated in recent years. According to index investment data collected by Barclays Capital for US and non-US assets under management, commodity index investment has increased from $55 billion in late 2004 to $431 billion in July 2011.

Bahattin Buyuksahin's Research in the Media

Bahattin Buyuksahin’s research on the role of speculators in crude oil prices, with Jeff Harris of the Syracuse University, was the focus of an article on SeekingAlpha.com. The article discusses Buyuksahin and Harris’ research, summarizing their conclusion: “They do not dispute a correlation between speculative activity and oil price – the participants in the oil futures market increased dramatically during the oil price spikes of 2007-8 - but they do not assume causation..” ViewFull Article (1/5/12)

Volatility: Not Unique to Exchange-Traded Commodities*

Fluctuations in commodity prices, particularly in crude oil prices, have been hotly debated in recent years. Some argue that underlying market fundamentals, especially the unexpectedly strong demand shock attributed to continued strong economic growth in Asia and other emerging economies, is the main reason for the resurgence of commodity prices and for the fluctuations in prices since 2004. Others argue that speculative activity in commodity derivatives markets is the main force behind surging commodity prices. They further claim that commodities have become a new asset class in investors’ portfolios, and prices are now more affected by macroeconomic news rather than by commodity-specific physical market conditions.