Use ETRM Software to Navigate Low Energy Prices
November 30, 2016
More than two years of low prices, unpredictable volatilities and increasingly intrusive regulations have created stress cracks across the global energy commodities complex. Regional power and natural gas markets, global markets in oil and products, and emerging markets like LNG are faced with a persistent oversupplied condition that has created unpredictable volatilities and reduced investment and trading activities by many market participants. Particularly impacted have been those companies that are naturally long commodities, including producers, generators, miners and growers.
While much of the cause of low prices is attributable to lower than anticipated demand due to low economic growth (particularly in the Asia Pacific markets), the regional picture can be different. For example, the regulatory backed influx of subsidized renewables in parts of Europe, particularly Germany, and in many states in the US, have depressed power prices, led to the accelerated retirement of coal plants and increased reliance on natural gas for peak needs. The combined effects of the massive influx of renewable generation capacity and increasing reliance on natural gas as fuel for both peaking and baseload capacity has established tight correlations between power and natural gas prices, leading to reduced trading activity and market liquidity in many power markets.
Oil and products prices have been impacted by low global demand and increasing supply. Geopolitical developments, such as increasing post-sanction exports by Iran, the inability of OPEC to exert influence on cartel supplies and increased production via fracking in North America have all conspired to depress oil and products prices. Though prices have recovered somewhat in recent months, refiners, marketers and producers are still struggling to operate profitably and ameliorate risks in a market that has seen prices fall by over 50% from their 2014 highs.
LNG has attracted massive investments around the globe in recent years in anticipation of a new vibrant market in the global trading of natural gas. Unfortunately, as new export facilities continue to come online, decreasing demand for LNG in the Asian markets, and particularly Japan, has led to an oversupplied market, leaving many of these facilities uneconomic…at least for the near future. While many experts had anticipated that increased demand for natural gas by LNG exporters would provide a needed boost to US gas prices, without increased LNG demand and improved global price spreads, it’s likely that many of the planned, permitted and early phase LNG liquefaction facilities may be delayed for years and gas prices will continue to languish.
Finding market opportunity and achieving profitability in these and other energy markets is increasingly difficult. Traditional trading strategies based on historical market development no longer apply. Operating profitably and limiting down-side exposures requires new strategies informed by a deep understanding of near real-time market conditions, constant monitoring of existing and emerging risks, and advanced analytics to test and analyze those strategies.
ETRM and Market Risks
Energy traders, producers, and marketers are faced with a myriad of risks under these current market conditions. A new research report by the leading CTRM market analyst firm, Commodity Technology Advisory LLC (ComTech Advisory), indicates that market participants view credit, regulatory, price, and position risks to be their most pressing exposures in the current low price market. Measuring and addressing these risks is an ongoing challenge as the exposure to each increases the longer this current malaise in the market continues.
While energy and commodity trading and risk management (E/CTRM) systems play a critical role in helping companies capture and measure these risks, few if any of these systems are capable of providing the advanced analytics and insights that are required to operate profitably and preserve value in today’s tumultuous markets. While E/CTRM can be the central hub of data and information, by themselves, they lack the advanced analytics capabilities that are necessary to identify opportunities and maintain profitability in a volatile and low margin environment.
As noted in ComTech’s report, E/CTRM systems are but one of potentially many specialized systems used by commodity trading firms to conduct business in a complex market. The research noted that market participants believe these many disparate systems and the resulting integration issues is the single greatest technology issue they face under current market conditions.
Further, in terms of technical capabilities necessary to address current risks and business challenges, the research found that risk reporting, asset and logistics optimization, data aggregation and risk analytics were cited by those same market participants as being the most critical capabilities required in a low price environment.
Those two key findings, the difficulty of integrating disparate systems and the need for advanced risk reporting, optimization and analytics, create a paradox for many market participants. Given that the data necessary to empower risk, analytics and optimization are not found in any single system, but rather scattered across multiple systems (such as one or more E/CTRM systems, data feeds, operational systems, ERP solutions, and even spreadsheets), addressing the risks and challenges inherent in this market can be a daunting task.
Solving the Paradox
Regardless of market conditions, aggregating data and information from multiple disparate systems (including on-premises and in the cloud) to measure and manage risk has traditionally involved complex integration infrastructures that required near-constant maintenance. Additionally, developing the tools and algorithms to read and analyze data from those many systems has also proven difficult and expensive – requiring specialized skills that are generally unavailable in most companies. Unfortunately, despite the increased risks posed by current market conditions, many companies are cutting costs and scaling back staff; putting the resources necessary to develop and maintain such infrastructures well beyond the reach of most market participants.
We talk to a lot of energy companies. They tell us that remaining profitable in today’s complex and volatile markets requires next-generation ETRM capabilities. Advanced analytics empower them to make better, faster, fact-based decisions. Harnessing data from both internal and external sources, Eka’s Commodity Analytics Cloud brings all the data needed together in one place to answer the most important questions. All types of analytics from simple aggregations to advanced predictive models are supported in Eka’s cloud-based analytics solution. Leveraging the scalable computation power available via the cloud, energy and commodities companies can quickly gain the insights necessary to ensure profitably and preserve value.
Using the Commodity Analytics Cloud app-based platform, traders can explore the data coming in from multiple sources to discover new insights and increase profits. Risk managers can investigate hidden risks faster and more effectively. Analysts can leverage multiple, complex algorithms and predictive models at a fraction of the time and effort. Supply chain and logistics managers can use advanced visualization and statistical optimization to make the best scheduling decisions and improve collaboration. IT specialists can quickly and easily respond to user requests for custom analytics. Back office personnel can analyze metrics to improve financial operations including confirmations, invoices, cash, and settlement. Executives can monitor all key performance metrics from across the entirety of the business and identify potential issues before they become problems.
Utilizing Eka’s Commodity Analytics Cloud’s scalable, high-value platform, energy and commodity companies can gain the insights and knowledge to maintain profitability, reduce risks and preserve value in today’s volatile and low prices market environment; all without the burden, time and expense required to develop their own analytics infrastructure.