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Uncertainty is Clouding the Energy Trading Outlook

of new gas-fired versus renewables facilities
is not yet clear, natural gas will certainly be
a significant contributor and gas burns for
power generation could increase by several
BFCD beyond otherwise “normal” demand
growth by 2030.

In early 2014, US natural gas prices began to recover from several years of depressed
prices brought on by oversupply. With prices
driven-up by a slowing of drilling for natural
gas and increased demand brought about by
a very cold winter and a gradual economic
recovery, the prospects for large scale LNG
export look somewhat less likely. However,
should the European economy recover from
years of economic recession, and growth in
China and the Asia Pacific region accelerate,

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large amounts of US LNG could find a market, particularly in
Europe, given the increasing concerns related to the reliability
of Russian gas supplies.

Should LNG producers’ plans come to fruition and LNG
exports do increase in-line with those plans, gas exports combined with increased domestic consumption and increasing
pipeline-based exports to Mexico, could result in demand
growing by as much 15-20 BCFD over the next decade, an
increase of more than 20% over current US production. While
it’s not clear how much excess delivery capacity currently exists in the system, there is no doubt that such a dramatic increase in demand will require huge investments in new drilling
and natural gas infrastructure, and will most certainly result in
higher prices and growing price volatility as excess capacity is
quickly taken up and producers scramble to meet demand.

REGULATIONS IMPACTING
ENERGY TRADING
The financial crash of 2008 ushered
in a new era of regulation, one that
has seen the G10 countries commit
to higher levels of regulatory oversight
and intrusive control over energy trading markets. The resulting market regulations -- in the form of Dodd-Frank
in the U.S. and EMIR/REMIT (among
others) in Europe -- continue to unfold,
and their market impacts are continuing to evolve.

The primary targets of the new regulations, large banks and affiliated financial institutions that trade commodities and financial
derivatives, have over the last decade invested heavily in energy trading and have often
become the primary facilitators of liquidity in
© Commodity Technology Advisory LLC, 2014

many physical and financial energy markets. As a result of the
new regulations, and combined with low returns due to low
volatilities and prices, many of these banks have decided to
exit the energy markets entirely, closing trading operations
and selling assets to non-bank entities. The potential loss of
market liquidity associated with the departure of these large
trading groups could increase price volatilities and risks for all
market participants in Europe and North America.

For non-bank energy trading companies, the impacts of
the new regulations are increasing the cost of doing business requiring greater cash reserves to meet margin requirements,
increased investments in technology and personnel to address
trade reporting requirements, and increasing the risk of running afoul of regulators who can, and have, assess fines in the
millions of dollars. These new and evolving regulations are further impacting commercial decision-making as traders must
balance growth with increased regulatory exposure and costs.