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Barclays To Exit Energy Trading; Risk of Liquidity Shortage? 

December 7, 2016

SmartStock News

Barclays has become the latest bank to announce its exodus from energy trading. Analysts believe that this decision of the bank will raise concerns in the oil industry regarding the liquidity which players of that industry can avail. Declining liquidity in the market for them might mean that they cannot use derivatives to hedge their risk in the market.

Since the financial crises of 2008, Wall Street companies have scaled back from the commodities markets. The companies have been facing a great deal of regulatory scrutiny in this sector due to which they are refraining from owning assets or taking positions here. The banks played a significant role in allowing these companies to bet many years into the future by using the derivatives market.

Now, Barclays has also withdrawn from the market, increasing the need for counterparties which can trade with the producers for their production in 2018 onwards. This situation might also increase the cost which these companies incur for getting into those derivative contracts. This potential increase in hedging cost will reduce the incentive for the producers of getting into such contracts, and if they don’t get into such contracts then they will be exposed to significant market risk. Given the current commodities market condition, where analyst doesn't expect the prices to increase substantially till the mid of 2018, operating without protection can mean taking a big chance of massive losses. Read more

 
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