Commodities a focus at Standard Chartered

Standard Chartered has seen growth in their commodities business for several years but there continue to be signs that they are bringing the senior talent -- including Paul Gregg as COO and now Ashish Mittal taking over as Global Head of Commodities Sales (see related article from AutomatedTrader) -- as well as starting to make the necessary budgeting on the IT side for significant growth and penetration into the physical markets.

Reference: AutomatedTrader, Standard Chartered makes senior management changes

DOE Loan Guaranty Solicitations

The U.S. Department of Energy announced on July 29, two loan guaranty solicitations, the first to support loans for renewable energy and electric power transmission projects and cutting edge biofuel projects that employ a new or significantly improved technology that is not a commercial technology, and the second to support loans for large transmission infrastructure projects in the US that use commercial technologies and begin construction by September 30, 2011.

The lending authority under the solicitations includes up to $2B in subsidy costs to support loans for renewable energy and electric power transmission projects, up to $500MM in subsidy costs for cutting-edge biofuel projects, and up to $750MM in subsidy costs for large transmission infrastructure projects in the US. Funding to cover subsidy costs for the loan guaranties is provided by the American Recovery and Reinvestment Act. The first application due date under each solicitation is September 14, 2009.

More subsidies, is that what we need to kick start infrastructure changes?

US Considers Limits on Energy Trading

Yesterday’s AP wire brought with it a surprising article about a push to establish trading limits on energy futures contracts. See below:

US considers limits on Energy Trading
US regulator says limits on energy futures trading must be weighed due to hurtful price swings
By Marcy Gordon, AP Business Writer, Tuesday July 28, 2009.

I am not sure this will fly.

Unregulated energy markets are terribly efficient today.
Prior to the futures exchanges and otc markets it was far easier for a company or group of companies or OPEC to stockpile physical oil; squeezing the market and bagging the windfall. Today yes, the price can be bid up on speculation but it cuts both ways; someone's bluff can be called and/or the market produces more supply, higher mileage vehicles become vogue, and the consumer crushes demand. These non-physical markets took OPEC out of the drivers seat and have kept them out.

Since 1972 (and probably before that) every time the government, or quasi-government agency, has attempted to rescue the general public from the evil oil & gas companies (including the trading community) they have created unnatural and inefficient "rules" inconsistent with a free market economy. Example: the price controls following the 1979 second oil crisis led to unnecessary regional shortages of gasoline and a boom for oil producers; i.e. "new" oil vs "old" oil. Prices remained artificially high for a number of years. Finally  Regan decontrolled the oil & gas prices in 1986 letting the natural state of supply and demand take over dropping the price to the floor along with his critics.

If indeed limits on energy trading are set, look for it to be short-lived. New rules create new games and the trade will out fox the regulators every time.

FERC develops smart grid transmission system

FERC took a step yesterday regarding the development of a smart electric transmission system. The Smart Grid Policy Statement sets priorities for work on development of standards that could help make such a system more reliable.

FERC set out policy for recovery of costs by utilities that act early to adopt smart grid technology. FERC got lots of comments from interested groups (70) that shows broad support for a smart grid policy.

FERC wants these early development standards: (a) ensure the cyber-security of the grid; (b) provide two-way communications among regional market operators, utilities, service providers and consumers; (c) ensure that power system operators have equipment that allows them to operate reliably by monitoring their own systems as well as neighboring systems that affect them; and (d) coordinate the integration into the power system of emerging technologies such as renewable resources, demand response resources, electricity storage facilities and electric transportation systems.

One interesting side note, FERC said that it will not interfere with any state's ability to adopt whatever advanced metering or demand response program it chooses.

This policy will take effect 60 days after publication in the Federal Register. I can send the entire policy if people want to read it just let me know.

So my question is what group emerges as smart grid leaders? Will it be the technology companies or will it be utility/energy companies? Here are some of the smart grid stocks I am currently following: CSCO, IBM, GOOG, COMV, DGII, ELON, ESE, GE, ITRI, TLVT, and RUGGF.

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”:

http://www.morganstanley.com/matrixinfo/

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.