Banks Vie More Fiercely For Energy Swaps, July 2003
Tue 27 Jul 2004
07/07/2003, London
By Barbara Lewis and Keyvan Hedvat
LONDON, July 7 (Reuters) - Competition among U.S. and European banks in energy derivatives is hotting up as new entrants jostle to fill the space left by Enron and other collapsed trading houses.
Waving their credit-worthiness trump card, players like Deutsche Bank are identified by rivals as the most aggressive among the banks that have either raised their profile or entered the market for the first time.
Merrill Lynch & Co., one of the biggest energy derivatives players in the 1990s, said last week it had reformed a U.S. oil and natural gas trading group after a two-year absence from the sector.
"Credit is one of the main issues," said James Ockenden, editor of specialist publication Energy and Power Risk Management. "Banks see an opportunity for growth. The market's extremely volatile at the moment. Banks like the volatility and they have the credit."
Volatility on oil markets has escalated during an 18-month period that has seen September 11, war in Iraq, and supply disruption from major oil producers Nigeria and Venezuela as a result of ethnic clashes and a general strike.
The liberalisation of the European gas and power markets has accentuated price swings in those sectors.
While boosting demand for hedging services, the volatility promises good returns for banks which can provide reliable counter-parties in a risk-averse climate.
"Clients, consumers who want to hedge probably feel more comfortable when dealing with a bank," said Roy Leighton, chairman of industry body the Futures and Options Association.
TRADITIONAL PLAYERS DOMINANT
Forceful new entrants are very unlikely to knock traditional heavyweights Morgan Stanley and Goldman Sachs out of the ring and some industry observers are sceptical that newcomers will stay.
"People come and go... It's cyclical," said one senior derivatives analyst. "The market's constantly changing."
Others see considerable potential for drawing customers away from the Wall Street giants for mainstream vanilla swaps and options, as well as providing niche offerings of their own.
"Progressively, for banks like ours, our books are looking just like oil companies," said Leighton, who is also chairman of the European Advisory Board of Credit Lyonnais. "We buy crude and sell products; we write contracts on crude, all fractions of the barrel and on refining margins; we're taking the risks away from customers."
Deutsche prides itself on products tailored to specific clients and has developed a specialism in correlation trading, or looking at commodities against other asset classes.
Since 2001, Deutsche has expanded its team of derivatives traders and opened an office in Calgary, Canada, complementing operations in Frankfurt, London, New York, Singapore and Sydney.
Dutch bank ABN Amro has also said it is pushing into energy derivatives. Last month investment bank N M Rothschild & Son said it too was setting up an oil risk management business.
South Africa's Standard Bank said its energy division has grown from six professionals in 1997 to 40 in 2003, 24 of them based in London. Oil traders also say Australia's Macquarie Bank Ltd has recruited one or two staff in London to cover energy derivatives.
Societe Generale was regarded by one banker as among the most successful of the chasing pack. "They're continuing to improve their position and getting business growth year-on-year," said a competitor.
But Bank of America Corp remains the biggest rival to the traditional top two, according to many in the industry.
GAS, POWER OFFER PARTICULAR GROWTH
Derivatives are instruments derived from cash market commodities, which are aimed at helping companies minimise the impact of price volatility on their financial performance.
Measuring any increase in volume on this unregulated over-the-counter market is notoriously difficult, though players say there has been expansion and is room for more, especially in the relatively young gas and power markets.
"If I had to guess, the derivatives market for oil liquids is five percent up in the first six months of this year versus last year, although I wouldn't call it a step change in growth," said a swap trader with a Wall Street bank.
Leighton agreed oil derivatives growth is steady, but saw potential for bigger expansion of gas-related derivatives.
The possibilities for growth in electricity are greater, though players are wary. "That's a market where there is growth potential, but it's at a quite early stage," Leighton said.
"Gas and power is certainly growing, but from an incredibly low base," one analyst said.
(Reporting by Barbara Lewis; Reuters Messaging: barbara.lewis.reuters.com@reuters.net, +44 20 7542 2637, fax +4420 7542 4453, London.energy.desk@reuters.com)
Tuesday, 8 July 2003 00:13:21
ENDS