US energy trading reforms gather pace

Regulatory reforms coming down the tracks in the US energy market have been likened to an 800lb gorilla in the room for a lot of energy companies.

That’s according to Michael Carter, Director of Credit Risk at EDF Trading North America, who is a speaker at the marcus evans 3rd Annual Risk Management in Energy Trading Conference, in Houston, TX  in October.

Carter says that although the impact of the Commodities Futures Trading Commission (CFTC) reforms are as yet widely unknown changes to risk management practices will be inevitable over the next year or so.

“We don’t know enough details just yet as to how it will affect different companies. For instance they may elect to permit ‘end user’ exception to differentiate the people who are solely in the business of trading energy products and derivatives for speculative purposes versus those who are doing it to hedge a natural position they already have. We just don’t have enough details although we know something’s coming, we certainly don’t know enough for people to begin to make grand assumptions about how they’re going to conduct their future business. There is a huge amount of unknown that’s hanging out there. This is an 800lb gorilla in the room for a lot of energy companies.”

Carter sums up the key challenges facing the industry at the moment in one worduncertainty. It all depends on the pace of the economic recovery, which will affect the demand for the product, he says.

“How is the coal industry going to be affected if there is a strengthening in public resolve about emissions? How is the huge amount of gas that has been discovered going to affect the geopolitical energy balance? Is that going to cause some shifting away from other energy sources? It will be very difficult for executives in the energy space to make long term plans. The unequal application of business practices has the opportunity to introduce arbitrage into practices.

“The biggest challenge right now is getting everyone on the same page. Back in the 90s there were energy companies trying to adopt a Wall Street-style risk management practices, that’s where the Enrons and the Dynages of the world started to really introduce something in the energy patch that basically had been in the financial kingdom. “

There is a dramatic number of physical energy players out there who do not fully embrace the more sophisticated risk management techniques yet, Carter highlights. “If they’re going to continue to evolve in their business practices, they’re going to have to step up the level of their capabilities above their personnel, system and policies.”

The marcus evans 3rd Annual Risk Management in Energy Trading Conference will take place on 21-22 October, 2010 in Houston, TX.