HEADWINDS IN ENERGY AND COMMODITY TRADING

The energy and commodity markets are continually evolving, and have recently experienced extreme variations in price. Unpredictability is predicted in energy trading markets, market players such as utilities, industrial corporations and trading houses are progressively facing an unusual recurrence of extraordinary events.

A recent Energy MDPI paper reasons out that “electricity prices are highly erratic, they fluctuate hourly, even minute by minute in some markets, owing to continuous variations in supply and demand, and they are overwhelmed by several parameters, e.g., weather, time of day, freezing of supply, maintenance [...],”

How, thus, can market members realistically hope to keep up with this continued status of volatility on a minute-by-minute basis, which is the new reality they are challenged with?

Structural Shifts Involving Energy and Commodity Trading

Of course, energy and commodity trading is constantly unfolding, and technological advancements have a key job to play in this. There is a collection of converging elements taking place simultaneously within energy and commodity markets corporations will desire to focus on being successful in the millennium:?

?Energy and Commodity Markets Are Turning into More Globally Interconnected.

Trading hubs are more correlated nowadays are steadily transforming from what used to be a collection of local trading hubs into more local markets. Besides trading long-term contracts, corresponding to the International Group of Liquefied Natural Gas Importers, around 40% of global LNG volumes were traded on a spot or short-term basis in recent times;?

Market Unpredictability And The Need For Algos

Short-term and spot markets are more or less being traded in real-time, and more than ever, automation is key. Utilities, industrial firms and trading houses have finally been turning up considerable intraday trading squads and advanced algorithmic models in order to help gain a competitive advantage;

Increased Competition

Energy and commodity trading has become considerably cutthroat. More eminent modern companies that buy considerable volumes of power and gas are further setting up their own trading desks. In addition, contemporary, autonomous companies are trading power and gas as a service for smaller-scale producers or users.

The Development Of New Commodities

The energy and broader environmental shift are giving boost to unique commodities such as renewable guarantees of origin certificates or voluntary carbon markets. Originally bilateral traded, it’s predicted these commodities to grow into over-the-counter (OTC) trading markets with limited liquidity that expect strong price risk management.

The Need For Direct Market Access Providers

Energy systems are drifting to a highly decentralised landscape, with large-scale energy power plants being, more and more, ousted by small-scale renewable energy producers. Yet many smaller enterprises have limited risk desire and capability to conduct all related workflows and marketing activities; for illustration, exposure to power prices and the hedging of the asset in the long term. As a repercussion, these companies are seeking for partners who are giving such services. This is an enormous opportunity for companies with a professional trading desk to scale their activities to extend market access services to third parties.

The Growth Of Data Analytics

The adoption of analytical tools and market data in real-time changes the trading landscape, with organisations wishing to run their own models, algorithms and strategies to gain further insights and increase trading margins. Advanced analytics, notably in volatile markets, can be an extremely potent tool to utilise additional analytics and systematic instruments to provoke insights and spot directions, risks, and opportunities to boost trading results.

KEY Factors

Structural changes will mean a transformation in the way market participants play. In order to support pace with the enlarged volatility of the energy commodity markets, it’s expected we will continue to see a speedy rise in using data, as well as an increasing emphasis around the concept of bespoke functions and algorithms. These markets will endure to be guided forward by further alterations, such as the leveraging of superior hosting, network services, as well as inclusive innovations of individual traders.

As a result, market members should welcome modern technologies that build up the capabilities of their traders. By adopting in resources that can power their business’s advancement, firms can take advantage of the range of customisable and scalable results that meet their ever-evolving needs - which could be the differentiating factor for gain. Taking decisive action now to put the building blocks in place will maximise a corporation’s ability to be resilient and flexible in changing market conditions.

Sources - MDPI