•  
  •  
  •  
  •  
  •  
  • Untitled Document
    Untitled Document

    Hedge funds driving energy trading activity

    Don Stowers, OGFJ Editor

    High commodity prices have made the energy industry as dynamic as it has been in some time, and the energy trading and risk management (ETRM) sector is no exception. Competition is fierce among energy traders, software vendors, and business and IT consulting companies.

    In late 2004, Oil & Gas Financial Journal published an article about the role of hedge funds in petroleum markets and how they had begun to drive energy trading activity. Although physical trading of energy commodities continued out of necessity in the post-Enron era, much speculative trading had dropped precipitously in the wake of the scandal. To many, energy trading had taken on a bad connotation. But this image was soon to change.

    By 2004, according to a study by JP Morgan, hedge funds had already begun to take over from the traditional energy marketing companies. In the three years since that article was written, hedge funds have assumed an ever-increasing role in the energy trading arena.

    Hedge funds are attracted to energy because of sustained price volatility, and investment methodology and strategy are the primary focus of the portfolio. It is difficult to know how much daily energy trading volume is from hedge funds. The funds often trade through banks, which makes it difficult to disaggregate data sufficiently.

    Banks and other financial institutions have led the way in the development and implementation of fundamental risk management principles for highly volatile energy markets. In doing so, they often team up with vendors to develop similar standards for risk management that they traditionally used in the financial markets.

    The performance of many of the hedge funds involved in energy has been spectacular. Some funds have reported returns as great as 250% from their speculative activities. Returns of this type are attracting other traders to follow suit.

    However, there have been some spectacular collapses as well. Amaranth Advisors, a large hedge fund based in Greenwich, Conn., is a case in point. Last year, a 32-year-old trader for Amaranth began to take gigantic positions in natural gas on the NYMEX exchange and later on the ICE exchange when NYMEX ordered him to reduce his holdings. He traded highly volatile futures contracts and at one point in the summer of 2006 reportedly controlled up to 70% of natural gas commodities on the exchange. Eventually the trader gambled and lost. Prices did not move in the way he had bet. Amaranth lost more than $6 billion and the company had to shut its doors.

    It is essential for trading operations to deploy risk mitigation strategies and techniques to help prevent such catastrophic losses. As energy traders recognize the inherent dangers in volatile markets, software vendors have developed solutions to help them in decision making and execution. Real-time decision support has become an important feature in most ETRM packages. This improved functionality helps make energy trading less of a gamble.

    Most Popular

    Related Articles

    Energy consultant Terzic joins Berkeley Research Group

    06/16/2015 Branko Terzic, a regulator, management consultant, and expert witness with international experience in the energy, public utility, and infrastructure industries, has joined the Energy and Natural R...

    Statoil to reduce workforce by end of 2016

    06/16/2015 Statoil’s efforts to standardize, simplify, and increase efficiency across its operations will now include a potential workforce reduction estimated at 1,100–1,500 permanent employees by the end of...

    Ceona appoints new CEO

    06/16/2015 Ceona, a subsea umbilicals, risers, and flowlines (SURF) contractor with deepwater subsea construction capabilities, has promoted Mark Preece, the company’s executive vice president of commercial a...

    Petroceltic International sells Romanian licenses

    06/16/2015

    Petroceltic International plc has provided an update on the status of its license interests in Romania. Following recent transactions, Petroceltic has no remaining interests in Romania.

    Orca secures IFC funding, proceeds with Songo Songo project

    06/16/2015 Orca Exploration Group Inc. is proceeding with the first phase of its Songo Songo development program offshore Tanzania following World Bank board approval of the International Finance Corp. (IFC) ...

    Southcross appoints Moxley as SVP and chief commercial officer

    06/16/2015

    Southcross Energy Partners LP has appointed Joel D. Moxley as senior vice president and chief commercial officer of Southcross Energy Partners GP LLC, the general partner of Southcross.

    More Oil & Gas Financial Articles

    Energy consultant Terzic joins Berkeley Research Group

    Tue, Jun 16, 2015

    Branko Terzic, a regulator, management consultant, and expert witness with international experience in the energy, public utility, and infrastructure industries, has joined the Energy and Natural Resources team of the strategic advisory and consulting firm Berkeley Research Group.

    Ceona appoints new CEO

    Tue, Jun 16, 2015

    Ceona, a subsea umbilicals, risers, and flowlines (SURF) contractor with deepwater subsea construction capabilities, has promoted Mark Preece, the company’s executive vice president of commercial and business development, to the role of CEO. 

    Orca secures IFC funding, proceeds with Songo Songo project

    Tue, Jun 16, 2015

    Orca Exploration Group Inc. is proceeding with the first phase of its Songo Songo development program offshore Tanzania following World Bank board approval of the International Finance Corp. (IFC) financing.

    Southcross appoints Moxley as SVP and chief commercial officer

    Tue, Jun 16, 2015

    Southcross Energy Partners LP has appointed Joel D. Moxley as senior vice president and chief commercial officer of Southcross Energy Partners GP LLC, the general partner of Southcross.

    Black Stone Minerals updates on management changes

    Tue, Jun 16, 2015

    Brent Collins has joined Black Stone Minerals LP as vice president of investor relations. The company also said that Richard N. Papert has decided to step down as a director, effective June 15.

    OGFJ photo of the day


    Click to view slideshow

    Oil & Gas Jobs

    Search More Job Listings >>
    Subscribe to OGFJ