US Energy Trading

The market shrank from US$1.8 trillion in 2001 to US$1.3 trillion in 2002, but will approach US$1.7 trillion in 2006.

Energy trading in the US grew at an extraordinary rate in the late 1990s, only to decrease dramatically in late 2001 and 2002 as Enron and then a host of other energy merchant firms collapsed. The loss of major traders that had been perceived as investment grade proved an object lesson in the importance of creditworthiness in financial markets. Other major problems came to light as well, and confidence in the market plummeted. The result was a decrease in volume in the natural gas markets and a collapse in volume in the electricity markets. In a new report, ,Celent examines the degree to which the market has recovered and the factors preventing the energy trading market from becoming efficient and liquid.

The market shrank from US$1.8 trillion in 2001 to US$1.3 trillion in 2002, but will approach US$1.7 trillion in 2006. While liquidity in the short-term market has recovered, it has been slower in coming to the longer end of the market. "The industry is finally starting to recover from the scandal that it will forever be associated with and is poised to grow substantially in the years to come," says Adam Josephson, analyst in the securities and investments group at Celent and author of the report.

Industry participants are paying far more attention to counterparty credit risk, using clearing mechanisms such as the NYMEX ClearPort platform. Price transparency has improved; risk managers such as banks and speculators such as hedge funds have become increasingly prominent, providing desperately needed liquidity, trading acumen, and better knowledge of risk to the market. Hedge funds in particular have been drawn to the financial market by the recent rise in crude oil, gasoline, and diesel prices, as well as the long-term trend toward higher and more volatile prices for crude oil and petroleum products, among other commodities.

Approximately 17 percent of the energy trading market is traded electronically, with short-term natural gas contracts being the most heavily traded via this medium. Celent estimates that electronic trading will account for 29 percent of the market by 2008.

Atable of contents is available online.

of Celent Communications' Institutional Securities & Investments research service can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.