Creation and Transfer of Price Risk in European Energy Markets

Transcription

1 Creation and Transfer of Price Risk in European Energy Markets Alessandro Mauro Director of Risk Management Energy Risk Summit Central & Eastern Europe Prague, 9 th -10 th of November, , rue du Conseil General 1205 Geneva, Switzerland Tel.: Fax: 41 22/ / Telex , TOPICS Structure of energy markets and genesis of price risk. Means of price risk modification and transfer. Role and competitive advantages for oil trading companies. 1

2 STRUCTURE OF ENERGY MARKETS Each energy sector is a dynamic system interconnected with other external energy sectors through many energy imports and exports. Most of the energy sectors possess internal production of energy sources. The total amount of energy which is inside the system undergoes transportation and transformation processes before being finally delivered and consumed. STRUCTURE OF ENERGY MARKETS Primary energy use EU 27 Energy dependency % EU 27 Crude oil + Natural gas + Coal = 56 % Europe is largely a net importer of energy sources, especially fossil sources, as indigenous production only partially meets demand. EU possess just about 1% of World s oil proven reserves, about 3% of natural gas reserves. EU energy dependency was 54% in 2006 and has been constantly increasing. Europe is importing relevant price risk from other regions of the World. Source: EUROSTAT, Key Figures in Europe, 2009 Edition. 2

3 EUROPEAN ENERGY PRICES = 100; USD nominal terms High correlation among energy sources (markets decoupling not true in a mediumlong term time horizon). Volatility and price risk are relevant. Source: BP Statistical Review of World Energy, 2009 PRICE RISK Why we have price risk in energy markets? Reduction of importance of long term contracts. Unbundling of vertical integrated energy companies. Reduction of cross-subsidization in the value chain. Infrastructures built only if can earn a proper rate of return, and not to meet special shocks to demand/supply. Liberalization of markets. Increase presence of pure financial companies. 3

4 PRICE RISK How energy players can transfer such price risk? 1. Physical transfer, i.e. through the exchange of energy goods. 2. Financial transfer, i.e. through the exchange of financial securities. PRICE RISK PHYSICAL TRANSFER through the exchange of energy goods Contractual transfer Price formulas (deterministic price risk transfer) Interfuel competition Competition among different energy sources for the same users (stochastic price risk transfer) examples: Natural gas prices determined from oil products prices and exchange rates. Netbacks oil pricing schemes. example: Coal competes with Fuel oil and Natural gas in power generation. 4

5 PRICE RISK FINANCIAL TRANSFER through the exchange of financial securities Derivatives represent an efficient, standardized and fast way to decrease/increase energy price risk. Derivatives are very diffused in oil markets. Oil futures are very liquid, with a huge number of counterparties. Unlimited retrading ratio (financial vs physical volumes). PRICE RISK FINANCIAL TRANSFER Basis risk: the efficiency of your hedges is far from 100% Basis risk is relevant in oil markets (i.e. energy markets, as per previous analysis). Spread reduced by 38% in 15 business days Example (exhibit): if you run a fuel oil power plant, you would better hedge with swaps on Fuel oil rather than with Futures on Brent crude. but swaps are less liquid. 5

6 ROLE AND COMPETITIVE ADVANTAGE FOR AN OIL TRADER Financial players participation is reducing : credit constraints, new upcoming regulation, etc. Oil traders here to stay: They need to trade both in physical and financial oil markets. They naturally have a two-sides flow: need to buy and sell, both physical and financial. They have willingness and expertise in trading basis risk, i.e. Swaps instead of Futures. They are one-stop shop for counterparties (buy & sell, physical & financial) They give the possibility to financially hedge other energy markets: natural gas formulas, proxy hedge coal, etc. (as per previous analysis). Credit risk now close to zero and simple to manage: active role of independent clearinghouses (Clearport, ICE Clear, NOS) Thank you! Alessandro Mauro Director of Risk Management www. litasco. ch 6