Morgan Stanley’s Matrix

If you want to see a cool example of RIA used in the trading space take a look at Morgan Stanley’s Matrix “microsite”:

The retail facing applications are definitely seeing value in upping the visual game. How long before this is required for in-house trading apps too?

A silly view on Demand Destruction

Recently Tony Hayward – BP’s CEO – was interviewed for an article in the UK’s Times newspaper where he claimed that Peak Oil was not a concern due to decreasing oil demand. You can refer to the original article here:

TIMES Online | BP's Tony Hayward warns of dwindling demand for oil

Here’s why I think Tony Hayward is wrong:

  • The Economy. Energy demand (and oil demand) are highly sensitive to the economic climate and this being a global recession it is natural that energy use would go down . Also, current events and dipping world demand is not unique to 2008/9 and it is a short term effect. If anything, it is remarkable that demand only decreased by 1.6% when every country in the world is reeling from the current economic gloom. For instance, it is expected that the US economy will shrink this year by at least 3%. Most European countries will be similarly hit.
  • The World. The last time the economy slowed down in a significant way the “emerging markets” were called “the third world” if you catch my drift. Not only will the Western economies come back the rest of the world is ready to consume significantly more per capita than ever before.
  • The Efficiency Myth. While it may seem a misnomer at first, energy efficiency leads to greater consumption not less! If you want to consult history for some indication just look at the 20th century ... all forms of major energy use (aka, transport, heating, industrial, etc.) are MUCH MUCH more efficient than in the past and yet the demand curve is completely inverted. Why? Efficiency leads to lower energy costs (at least typically) and that combined with technological innovation lead to more and more ways to use energy. It is true that efficiency programs can have a short term effect on demand but even then they are often given too much credit as they are typically in fashion when the economy is in the proverbial toilet. Look at the 1970’s ... the whole “negawatts” movement spurred lots of positive movement toward energy efficiency (double glazed windows, maximum speed limits, incentives to insulate homes, etc.) but the downturn in demand was a flash in the pan.

Why would Tony say this?

  • BP is an “oil company”. For almost all of BP’s storied history BP stood for “British Petroleum” and then for a brief moment they decided to change it to “Beyond Petroleum” which was a sneaky way of saying “we provide energy in any form”, “we’re greener than you think”, and “don’t hate us”. Tony Hayward was the person who made it clear that BP now stands for “Back to Petroleum”. In any event, the point is Oil companies are in the business of selling oil to the exclusion of very little else. Conspiracy theories aside, having marketing messages that help you make more money are not unusual in business and Tony is just doing what any CEO would do ... looking for messages that help his business prosper.
  • Kill the Alternative. BP is ok with gradual investments into alternative/sustainable forms of energy and even participates in these markets but as an Oil  company it benefits from doubts surrounding the potential of alternatives. The message about reducing demand is not a direct assault on alternatives but indirectly it weakens the economic argument for alternatives and takes some urgency away from switching away from fossil fuels (although the ecological/environmental urgency remains intact).
  • Don’t Panic. Volatility is bad for most companies (trading companies excluded if they’re any good) and Peak Oil has the potential to create massive volatility through panic buying. Obviously panic would drive up the prices of oil (at least in spurts) which might seem like a not entirely bad thing for an oil company. However, the problem is the damaging impact it would have on the economy (and consequently consumption), and as history and current events have shown,  the economy suffers much more through severe price volatility than it does when oil prices are high (look at Japan or even EU versus US as case studies on how sustained high energy prices can be absorbed into a healthy economy).

The one thing I think may be interesting over the next 5-10 years is the electrification of personal transport and heating (via heat pump technology). Especially the former could have a significant impact on the refined products market and I have no idea what that would look like but I’m sure it’s something that oil companies and refiners would rather not find out about. If there truly is a wholesale shift toward electrical transport and heating then potentially Tony will be right about oil demand (although it says a lot less about overall energy demand) however his rationale for demand destruction makes no sense to me.

This is just my opinion, happy to hear others’.

Triplepoint Strategy in Europe

Interesting article - one key takeaway is about TriplePoint's strategy of teaming up with SAP to make inroads into the European utilities market. The article points out that this may be a way for them to break OLF's hold on this market.

Shell Oil Staff Reductions

Global staff reductions through attrition and layoffs for 2009 are targeted at 15%. This will not impact Shell Trading which has already exceeded its 2009 budget and at current pace will easily surpass target by 150%.

Can physical energy contracts ever be classed as derivatives?

Wikipedia says:

"Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying value on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) — see inflation derivatives), weather conditions, or other items. Credit derivatives are based on loans, bonds or other forms of credit."

The reason this might be important is Tim Geithner's recent statements around the regulation and reporting of OTC derivative trading that he, through the Commodity Futures Trading Commission (CFTC); the Securities and Exchange Commission (SEC); and through amendments to the Commodity Exchange Act (CEA); wants to see implemented in the US

The major banks already fimiliar with this sort of requirement. They already have central trade warehouses for credit and other OTC derivatives. And they already understand the impact and benefits they can expect from a similar setup for commodities. But I am not sure it is as obvious for the major energy companies. Hence the question about physical derivatives.

How much will this regulation effect energy companies and if it does, are they ready?

Can the Banks stay away from an opportunity here?

Oil continued its rally rising above $67 for the first time since November 08 (Oil prices climbed 30% in May 09, the largest monthly gain since 1999) on sustained hopes for a global economic recovery with the Saudi oil minister Ali al-Naimi predicting prices will reach $75 sometime this year.

Can the Banks stay away from an opportunity here?

Source BBC, Reuters etc. Citigroup mentioned today (1st June 09) that it will boost its Asia energy and commodities business by increasing its trade and marketing staff as it aims to sustain double-digit growth to capitalize on the region's rising influence on world markets.Also, there will be expansion into soft and some of the more esoteric commodities that we are currently doing out of London. It's a case of offering more of our global products to Asian client base."

Barcap also confirmed today that they have seen increased volumes across its commodities trading business since the start of this year and Coal & agricultural commodities would be growth areas for the next 2-3 years.

RBS mentioned in a recent interview how Commodities is their focus and continues to contribute to their bottomline.

Goldman Sachs & Morgan Stanley stay the undisputed leaders in trading oil, including physical cargoes, for the past 10-20 years but are being challenged by Barclays, Citigroup, JP Morgan, RBS Sempra & Standard Chartered.

Up to 2007-08, Citigroup's trading business was divided into 60 percent for oil, 30 percent for metals and 10 percent others but this could change ! They have announced that its current trading strategy is to link the bank's extensive client network, where it is seeing new investor appetite, with expertise across the oil barrel that will include naphtha; as well as coal, LNG, emissions and freight, filling the void left by some investment banks like Merrill Lynch, Bearn Sterns, UBS and some Hedge funds. Citigroup will grow further into trading of agricultural commodities, which will become more popular among its clients as the economy recovers in China and India, and will give more focus to metals.Efforts at developing exchanges across Asia would help to boost liquidity in the energy and commodities markets, though it is difficult for now to see prices being driven from Asia.NYMEX Clearport volumes for Asia mainly for fuel oil during January to May 2009 showed a 300-600 percent jump versus the same period last year, signaling traders' shift toward clearing in a risk-averse climate.