Convergence of Energy and Financial Markets

Abstract

The energy market has been characterized in recent years by an enormous amount of volatility and record high prices. One of the significant trends that we see emerging out from this development has been the convergence between the physical energy and financial markets. While there have always been players straddling both the financial and physical market space, we now see a build up in momentum and the line between the Financial Institutions (FIs) and Energy majors in both the physical side and the paper side of the business fading fast with Physical players becoming more active in the paper side of the business and the financial players investing in physical assets. The increased volatility across energy commodities due to increasing demand and supply bottlenecks has thrown up opportunities for both the energy majors and FIs. FIs entering the physical energy trading space are looking to leverage their expertise in the paper markets as a new avenue to achieve sustained earnings growth by trading in oil and gas to electricity futures. On the other side of the coin, the energy majors see this increased activity as an opportunity for enhancing their revenues by selling derivative products and coming out with structured products as well. Further impetus to this convergence has been in the form of easing of regulations and laws which make it easier for FIs to acquire physical assets. This article explores the drivers for the inter turf movement by FIs and energy majors and the technology imperatives for the players to be successful in this new market place.