Thursday, April 26, 2007

US Energy Trading Market

Market Size & Forecast

According to a report titled "U.S. Energy Trading," by technology consulting firm Celent

=> The U.S. energy trading market shrank from $1.8 trillion in 2001 to $1.3 trillion in 2002, but will approach $1.7 trillion in 2008 as banks and hedge funds pick up where failed energy merchants left off.
=> Energy trading grew at an extraordinary rate in the late 1990s, only to decrease dramatically in late 2001 and 2002 as Enron Corp. and other failed energy merchant firms collapsed.
=> About 17 percent of the energy trading market is traded electronically, with short-term natural gas contracts being the most heavily traded via this medium.
=> Celent estimates that electronic trading will account for 29 percent of the market by 2008.
=> As the U.S. energy trading market matures, the report found, banks and hedge funds should help drive solid, steady growth as market participants become increasingly comfortable using risk management tools.

According to Energy Insights, an IDC company

=> Energy trading in liquid hydrocarbons will continue to be robust, buoyed by high prices and increased volatility.
=> Trading in electricity and natural gas will recover from the post-Enron slump.
=> Altogether, Energy Insights forecasts the market to grow by 30% during 2002-2006, with oil and gas majors and financial service firms dominating the trading markets, but with asset-based traders - particularly in power - reengaging.
=> Further on the horizon, increased participation of financial institutions in energy commodity trading will bring program trading in 2008 to 2010.

Trends & Issues

Renewed interest from investors
The industry that Enron made infamous - energy trading - is springing to life again. Volatile energy markets and record-high commodity prices are prompting renewed interest from investors eager to play in the sector. That has pushed banks and a growing number of hedge funds to hire more energy traders and brainy quantitative minds to back their bets on energy prices. In Houston, New York and London, a scramble for top trading talent has ensued that rivals the cutthroat hiring frenzy of the late 1990's. "The whole market is hot right now," said Justin Pearson, managing director of Human Capital, a search firm based in London for energy traders. "Everybody is talking about expansion."

More sophisticated tools & platforms
Industry participants are now paying far more attention to counterparty credit risk, using clearing mechanisms such as the Intercontinental Exchange and the New York Mercantile Exchanges ClearPort platform. Price transparency has improved and banks and hedge funds have become increasingly prominent, providing desperately needed liquidity.

Banks playing an important role
With that revival come questions from some financial market analysts about whether energy trading will be better able to withstand another potential meltdown. While banks have stepped in with their superior balance sheets, credit ratings and trading skills to fill the liquidity void left by Enron, the latest ramp-up in trading has also been marked by an air of secrecy underscored by the proliferation of hundreds of hedge funds that are speculating on everything from crude oil to electricity in both regulated and unregulated markets. Many funds are being aided by investments from banks, which are also buying up distressed power plants and other remnants of the collapsed sector.

Investment banks are major players
Wall Street banks are notoriously fickle about their commitment to commodities trading. Two dominant players among banks, Morgan Stanley and Goldman Sachs, for example, participate in both the physical and financial energy markets and provide risk management products for clients and their own accounts. A number of other banks have also recently opened energy trading desks. Hedge funds and other speculators, meanwhile, have been drawn into the financial markets by the recent rise in crude oil, gasoline and diesel prices, as well as the long-term trend toward higher and more volatile prices for crude oil and petroleum products, among other commodities. In 2004, Goldman and Morgan Stanley earned about $2.6 billion combined from commodities trading, most of that from energy, according to Sanford C. Bernstein & Company in New York.

Top Companies with In-house Energy Trading Divisions

Sempra Energy Trading ® Corp. (SET) Wholly owned subsidiary of Sempra Energy)
Sempra Energy Trading ® Corp. (SET) is a full-service energy trading company - one of the largest in North America. It markets and trades physical and financial energy products: crude oil and refined products, natural gas and natural gas liquids, power, coal, emissions and ethanol. Sempra Energy Trading ® has more than 1200 customers worldwide. Our customer base includes most of the major oil, gas and power companies in North America, Europe, Asia and South America. Its high-volume financial transactions can involve over 100 billion cubic feet (bcf) of natural gas daily. That translates to approximately one half of all the natural gas consumed daily in the U.S. and Canada. SET is a wholly owned subsidiary of Sempra Energy, a Fortune 500 energy services holding company based in San Diego, California.

Chevron’s Supply & Trading
Supply & Trading manages Chevron's global supply chain, supplying crude oil and refined products to the company's global refining and marketing network. In addition, Supply & Trading markets aviation fuels, marine fuels and marine lubricants.

Supply & Trading plays a critical role around the globe, optimizing system assets, trading and marketing crude oil and refined products, and managing associated risk across the global supply chain.

Headquartered in Houston, it has regional hubs in London, Singapore and Cape Town. Crude and Products Supply & Trading conducts business in nearly 70 countries and trades more than 200 different grades of crude oil and petroleum products.

LITASCO (LUKOIL International Trading and Supply Company)
LITASCO (LUKOIL International Trading and Supply Company) is the international arm of LUKOIL for marketing, supply and trading. It is composed of various companies that are coordinated by and report to LITASCO Geneva, the Group's parent company. The LITASCO Group is made up of subsidiaries and branches in the United States, Netherlands, Sweden, Germany, Middle East,and Singapore. In total, the LITASCO Group is present in thirteen different countries.

LITASCO is one of the world's major traders of crude oil and refined petroleum products. The company's purchases and sales include spot, term, exchange and other arrangements such as swaps, and cover a wide range of locations and counterparts in order to optimize revenues while ensuring security of supply, flexibility and cost competitiveness. LITASCO deals with more than two thousand suppliers and customers, including all of world's major oil corporations.

The activities of the LITASCO Group are split into four main areas:
# Marketing and distribution of LUKOIL crude and petroleum products internationally.
# Supply and logistical optimization of crude oil to LUKOIL refineries located outside of Russia, and of petroleum products to the LUKOIL retail network in Eastern Europe, the Caucasus, and Baltic States.
# Entrepreneurial third party of crude oil and refined products from a global network of trading offices.
# International business development and coordination.

Koch Supply & Trading
Koch companies have interests in and access to major international trading regions in the United states, Europe, Asia and the Middle East. Koch Supply & Trading companies offer customers innovative risk management tools and help businesses worldwide manage margins, cash flow, grade spread and inventory, as well as provide supply, trading, technical and operating services.

Products traded by Koch Supply & Trading companies include:
# Petroleum & chemicals: crude oil, petrochemicals such as benzene, toluene, mixed xylenes, paraxylenes and styrene; diesel, jet and residual fuels, and intermediate feedstocks such as naphtha, vacuum gasoil and straight run fuel oil.
# Risk management products: structured risk management products such as derivatives, cross-commodity and other hedging products.
# Natural gas & gas liquids: natural gasoline, butane, ethane, propane, olefins such as ethylene and propylene, and plastics.

Active on a number of international exchanges such as NYMEX , LME, IPE, SPCEX, NYBOT, CBOT, CME, EUREX, LIFFE

AEP Energy Services (Subsidiary of American Electric Power Company, Inc.)
AEP Energy Services, Inc. is a national energy company engaged in the marketing and trading of energy commodities and related services. Specifically, the company analyzes and projects current and future market clearing prices for various energy commodities; trades energy commodities and associated financial instruments in both regional and national energy markets; and, markets energy supplies and related services to both the wholesale and large industrial segments of the energy market. AEP Energy Services, Inc. is a wholly owned subsidiary of American Electric Power (AEP), one of the nation’s largest investor owned utilities.

Duke Energy Trading and Marketing (DETM)
Duke Energy Trading and Marketing (DETM) is a joint venture in which Duke Energy Corporation has a 60 percent interest. DETM markets natural gas, electricity and other energy-related products to a wide range of customers.

Southern Company Energy Marketing (a unit of Southern Company)
Southern Company Energy Marketing is jointly owned by Southern Energy Inc. and Vastar Resources Inc. Southern Company Energy Marketing provides energy marketing, risk management and financial services and other energy-related commodities, products and services to customers in North America. Southern Energy’s parent company, Southern Company (NYSE: SO), is one of the largest producer of electricity in the United States.

Shell Trading (US) Company
Shell Trading (US) Company is a corporation that acts as the single market interface for Royal Dutch Shell companies and affiliates in the United States. It became operational in August 1998 and has offices in Houston, TX (headquarters); Dallas, TX; Denver, CO; Midland, TX; and San Antonio, TX; and has an affiliated Shell Trading company in Calgary, Alberta. Shell Trading Highlights:
# Buys and sells more than five million barrels per day of hydrocarbons
# One of the largest physical traders of hydrocarbons in the United States
# One of the world's largest energy trading company

Its portfolio includes the buying and selling of physical crude oil, finished products, and feedstocks, as well as trading various paper products, both on exchanges (The New York Mercantile Exchange and The Chicago Mercantile Exchange) as well as over the counter. Through its operations, Shell Trading (US) Company buys and sells more than five million barrels of hydrocarbons per day in physical markets, making it one of the largest petroleum supply organizations in the United States and the world. Specific businesses include acquisition, sales and trades of domestic crude oil and products; lease crude oil acquisition and marketing; marine chartering; and risk management services.

Reliant Energy Securities & Commodities Trading Center
The company has a wholesale energy trading and marketing business that ranks among the top five in the U.S. in combined electricity and natural gas volumes and has a presence in most of the major power regions of the U.S. It also has power generation and wholesale trading and marketing operations in Western Europe. The Reliant Energy Trading Center is located on the first floor of the Jerry and Kay Cox Graduate Business Center. The facility seats up to 40 students at computer workstations. It is outfitted with two Bloomberg terminals, four independent LED projectors, a SMART Technology system and two drop-down screens. The center also features the Kiodex Risk Workbench, a state-of-the-art trading and risk management platform.

Some other major players that operate in energy & commodities trading on various exchanges are:
• El Paso Energy
• Totalfina Elf
• Continental Power Exchange
• Calpine Corporation
• Exelon Corporation
• Dominion Resources, Inc.
• Southern Company
• Constellation Energy Group, Inc.
• Mirant Corporation

Top Companies from Financial Services Sector
• Deutsche Bank AG
• Goldman Sachs
• Morgan Stanley Dean Witter
• SG Investment Banking
• Bank of America
• American International Group

List of Exchanges for Global Commodity Trading
• Chicago Board of Trade
• Chicago Mercantile Exchange
• Euronext.liffe
• Kansas City Board of Trade
• London Metal Exchange
• Minneapolis Grain Exchange
• New York Mercantile Exchange
• New York Board of Trade
• Winnipeg Commodity Exchange

For a list of other commodity exchanges, please click on the following link:

List of online Commodity Exchanges
IntercontinentalExchange, Inc. (NYSE: ICE)

APX Inc.

Enporion, Inc.

Petroleum Place, Inc.