Energy Trading in 2017 – Are You Prepared?
November 2016 recorded significant price volatility within the energy and commodity sector with energy prices falling as much as 6.7 percent. Following the Q3 gains of up to 5.1 percent, this sharp decline created quite a furor in the markets. Even though we saw prices drop in Q4, analysts don’t expect that trend to continue. In fact, according to Commodity Markets Outlook (A World Bank Quarterly Report), prices for most commodities (including oil, natural gas, and coal) are projected to jump as high as 25 percent in 2017. With this persistent price volatility it is more important than ever that energy and commodity traders have comprehensive energy trading software solutions that are capable of minimizing the risks that are most often brought about by inaccurate valuations in their energy portfolios.
In response to the projected record-breaking upheavals in the energy and commodity markets in the coming year(s), many utilities are taking strategic steps to seek and acquire the kinds of market-based resources and energy trading software solutions equipped with advanced algorithms capable of optimizing energy and commodity trading to account for this dogged volatility. These energy and commodity trading solutions must, by necessity, have best-in-class forecast modules and significant real-time nimbleness to help mitigate the potential fallout from these upheavals.
The International Energy Agency’s (IEA) World Energy Outlook 2016, projects that renewables and natural gas are going to be energy winners for the next decades. According to IEA’s executive director, Dr. Fatih Birol, “We see clear winners for the next 25 years—natural gas but especially wind and solar—replacing the champion of the previous 25 years, coal.”
Many utilities are already experiencing the practical application of Dr. Birol’s assertions. Take, for instance, the polar vortex which shook the energy markets in 2014. The demand of natural gas for power generation is not going away anytime soon, as consumers demand cleaner sources of energy. This demand is driving investments in renewables, which, in turn, has led to their increased adoption and a drop in prices.
For traders, the shift to cleaner power creates its own challenges. Both renewables and natural gas are susceptible to high unpredictability, because they are heavily affected by uncontrollable environmental factors like the weather—excessive use of gas/power in cold/hot weather and power generation when the sun/wind is available. Although bulk power traders are hardly automobile racers, Bobby Unser’s aphorism “Success is where preparation and opportunity meet,” aptly captures how utilities should deal with the forecasted trends in energy and commodity trading.
To weather the ride that lies ahead, wholesale energy traders should take immediate steps to prepare not only to overcome the projected challenges but also to seize the opportunities that are going to be created by the upheavals in commodity and energy markets. An investment in advanced commodity and energy trading software that has built-in forecasting functionalities, a full suite of risk management features, and that is responsive to regulatory changes, will help ensure that utilities can not only survive, but thrive in the years ahead.
About the Author:
Salah Khuhro has more than 15 years of experience in the Commodity Trading and Risk Management (CTRM) industry. As Associate Vice President Sales at OATI, Mr. Khuhro oversees OATI’s strategy to provide optimal CTRM Solutions to Investment Banks, Power Marketers, Independent Power Producers (IPPs), and Hedge Funds. His experience in Commodity Trading, Scheduling, Risk Management, and Settlements allows him to develop strategic recommendations with respect to a client’s CTRM business needs. Mr. Khuhro received his B.A. in International Business from Eckerd College and his MBA from the University of South Florida.