Barclays exit isn’t surprising since many large investment banks have also minimized their profile in the energy trade following the 2008 financial crisis. While merchant traders have sought to fill its shoes, given their aversion to the futures market and their limited financial capacity, it is only a matter of time before heavy hitters, including Goldman Sachs & Co and JPMorgan Chase & Co fill the gap.
In what could be signs of more trouble for oil producing companies, Barclays Plc has joined a growing list of banks which have exited trading in energy. As per analysts this is worrisome since falling liquidity for oil producers will essentially block the usage of derivatives to hedge against future oil prices.
Following the 2008 financial crisis, Wall Street firms have scaled back their risk profile in the commodities market and have tended to avoid taking any firm position or owning physical assets in the commodities market in the face of increased regulatory scrutiny.
Before the financial crisis, banks were the big boys in the commodities futures market.
Barclays exit only goes to underscore the fact that there is a growing scarcity of counterparts for trade, especially when oil producers try to hedge their production for 2018 and beyond. The lack of such a possibility only raises the cost of the output.
This could force cash-strapped producers to forgo protection altogether which is likely to expose them to greater risks if the oil market heads south.
Some oil producers are wanting to lock their future profits and fund their expansions plans by selling 80% of their future production.
“It’s one less bank willing to make a trade in the market, which reduces liquidity overall. That’s one less source of credit and one less counterparty,” said John Saucer, vice president of research and analysis at Mobius Risk Group.
As per an internal memo, Barclays has said as far as its ‘Macro’ trading division is concerned, it will keep a hands off approach in the energy business.
As per traders and executives within the industry, Barclay’s move wasn’t surprising, as it has been scaling down its profile in the energy business since some time now.
Nevertheless, its departure represents another big player from the top five player’s league from the energy space.
Among the other big players who have exited the energy market include, Deutsche Bank and RBS Sempra.
Barclays’ departure has been replaced by merchant traders, including Glencore Plc, Mercuria Energy Group and Vitol Group.
However merchant traders, unlike investment banks, prefer to trade around their own physical positions, which are typically tied to derivative contracts with a short expiry date.
“Merchant books are physically oriented. They don’t offer the same type of liquidity that the banks do,” said Saucer. “When they’re there, it’s patchy and specific. It’s ancillary to the other stuff they’re doing.”
This naturally means, Merchant traders have little to no interest in futures and in this respect they have not managed to fill the gap left by big investment banks. Furthermore, merchant traders have tighter credit availability and don’t prefer their capital exposed to long distant future trades.