Energy markets have transformed over the past decade in an accelerating process driven by a mix of deregulation, information technology and shifting fuel economics.
Managing the volatile risks that come with those changes has sparked a proliferation of hedging products and boosted volume on major exchanges that offer clarity and a degree of financial reassurance for energy companies traditionally reliant on lengthy bilateral contracts that leave them hugely exposed to suppliers and customers. With its purchase of the New York Mercantile Exchange in 2008, exchange operator CME Group became the leading venue for energy trading and placed itself squarely at the intersection of still-evolving trends in the sector.
“We are all about the customers and serving the clients, allowing them to shed and take on risk in a reliable and liquid marketplace,” CME’s Group Energy Products Managing Director Gary Morsches told Breaking Energy in a recent interview. Morsches was appointed to the job at the end of September.
“Markets do evolve,” he said, and pointed to the group’s recently launched and recently announced new contracts as proof of CME Group’s commitment to keeping up with the industry’s evolving needs. In addition to a recently launched European biodiesel contract and a Western Canadian crude oil contract, CME is wading into the Brent market, the largest oil benchmark outside of its own West Texas Intermediate futures contract, the contract usually quoted as “the oil price.”
Although Morsches says that WTI “remains the world benchmark,” customer interest in a Brent contract, which reflects production of crude oil from the North Sea, prompted the development of a new contract set to launch December 12.
World Class
“Energy is a global commodity,” Morsches says, and the company’s energy business is built on an international group of in-house experts able to gauge evolving markets and shifting trends to develop tools based on customer feedback. There are many criteria in developing those new tools, but fundamental supply and demand balance data, built on input from public sources, in-house data banks as well as the occasional contracted data feed, continue to form the basis of evaluating a new contract.
As the industry changes, sometimes the market evolves into an existing set of hedging tools as changes in fuel types or usage drives trading volume for existing CME products higher. As the percentage of electricity generated by natural gas continues to increase the convergence and mutual dependence of the two commodities, the exchange’s already strong natural gas and power trading businesses have become even more appealing. The firm’s power contracts hit a record one billion megawatt hours of open interest in late October, underpinning the importance of the exchange group’s early move into electricity markets that have taken time to fully emerge as large-scale viable hedging tools.
A relentless focus on customer needs is at the center of CME’s energy business, Morsches said, and as markets change, “we’re listening.”
