Energy and commodity markets are constantly changing and have recently seen extreme price swings due to global gas shortages, post-lockdown industrial demand, and reduced wind generation in Europe. While volatility can be expected in the energy trading markets, market participants such as utilities, industrial companies and trading houses are increasingly facing a greater frequency of extreme events. A recent MDPI Energy paper notes, “Electricity prices are very volatile, varying hourly, even minute by minute in some markets, due to constant changes in supply and demand, and are affected by many factors, for example, weather, time of day, supply suspensions, maintenance […], “
How, then, can market participants realistically expect to keep up with this constant level of volatility on a minute-by-minute basis, what new reality are they facing?
Structural changes affecting energy and commodity trade
Of course, energy and commodity trading is constantly evolving, and technological developments have a major role in this. There are a number of converging factors occurring simultaneously within the energy and commodity markets that companies will need to address to succeed in the future:
Globally, energy and commodity markets are becoming more interconnected
Trading centers are increasingly connected nowadays and are gradually shifting from what were previously a group of local trading centers to more regional markets. Besides trading long-term contracts, according to the International Group of LNG Importers, about 40% of global LNG volumes have been traded on a spot or short-term basis in recent years;
Market volatility and the need to go nuts
The short-term and spot markets are traded more or less in real time, and automation is more key than ever. Utilities, industrial companies and trading houses then built larger daily trading teams and advanced algorithm models in order to help gain a competitive advantage;
At the same time, energy and commodity trading has become more competitive. More and more prominent industrial companies buying large quantities of energy and gas are also setting up their own trading offices. In addition, new independent companies are trading energy and gas as a service to producers or buyers on a smaller scale.
New merchandise appears
Moreover, broader environmental and energy transformation has led to the emergence of new commodities such as renewables guarantees for certificates of origin or voluntary carbon markets. These commodities are initially traded on a binary basis and are expected to evolve into over-the-counter (OTC) trading markets with limited liquidity that require robust price risk management.
The need for direct market access providers
Energy systems are shifting to a more decentralized landscape, as large-scale power plants are being replaced more and more by small-scale renewable energy producers. However, many smaller companies have less risk appetite and less ability to manage all work flows and related marketing activities; For example, exposure to energy prices and hedging of a long-term asset. As a result, these companies are looking for partners who provide these services. This is a huge opportunity for companies with a professional trading desk to expand the scope of their activities to provide market access services to third parties.
The emergence of data analytics
The trading landscape is influenced by the use of analytical tools and real-time market data, as institutions want to run their own models, algorithms, and strategies to gain more insights and increase trading margins. In practice, advanced analytics, especially in volatile markets, can be a very effective tool for using additional analytics and methodological tools to generate insights and identify trends, risks and opportunities to enhance trading decisions.
I think these structural changes will mean a change in the way market participants operate. In order to keep pace with the increased volatility in the energy commodity markets, we are expected to continue to see a rapid rise in data usage, as well as an increasing importance around the creation of custom applications and algorithms. Moreover, these markets will continue to move forward with more adjustments such as taking advantage of excellent hosting and networking services, as well as comprehensive innovations for individual traders.
As a result, market participants must adopt new technologies that enhance the capabilities of traders. By investing in resources that can fuel their business growth, companies can benefit from a suite of customizable and scalable solutions that meet their ever-evolving needs – which can be a defining factor for success. Taking decisive action now to put the building blocks in place will increase the company’s ability to be resilient and resilient in changing market conditions.