Energy markets aren’t for the faint hearted. They’re vast and complex, maintaining a delicate balance between the reality and challenges of energy production: refinement and delivery, end-user consumption or trading, and the need to hedge and manage operational and financial risk.
The reasons to participate in energy markets are varied. Energy producers have real-world requirements to produce, refine, transport, and deliver physical energy, ultimately for the benefit of end-consumers. Largescale consumers such as airlines or retail chains must ensure they’re getting the best pricing and most reliable delivery. Financial firms like banks and specialist trading houses act as market makers, bringing liquidity, and offering tools for risk management and hedging, as well as a smorgasbord of financial facilities from financing to currency exposure management.
Overall, while the financial sector has embraced settlement efficiencies across all of these activities, the energy industry is still grappling with longer settlement cycles and largely manual processes. Energy contracts are often bilateral OTC agreements, with large and complex confirmation requirements, leading to prolonged settlement cycles as well as communication challenges in the case of disputes. Improving settlement processes positively impacts all market participants from producers to speculators and everyone in between.
Accelerated change and the impact of sustainability
The energy market is evolving at speed, with an increase in the variety of assets and trading volumes as a result. In part, this is driven by the need for trading and risk management solutions that account for financial need, real world socio-economic and political events, currency exposure and the ever-growing prevalence of sophisticated algorithmic and electronic trading solutions.
The world’s commitment to reduced reliance on fossil fuels, in accordance with the Paris Agreement is also driving rapid change. Renewable energy currently accounts for just 14% of energy consumed. To meet these new targets, renewable energy will need to increase to over 75% by 2050. Energy producers are embracing this, in part as a result of regulatory and consumer pressure. They are actively working towards long-term solutions for the production of clean, renewable energy, alongside mitigation measures such as hydrogen or carbon capture projects. The market is also increasing its use of green or sustainable financing products.
Data doesn’t care about complex contracts or workflows
With a wider variety of products and assets today, there’s also an increase in trading volumes and liquidity bringing an increased need for settlement processes. This is challenging in a market that is far behind other financial markets in realizing the opportunities and benefits of sophisticated technology for trading and back-office workflows. For most energy market participants, settlement processes are manual, slow, inefficient, and error-prone, with little or no digitalization.
The benefits of improved data management and process automation for the energy market are significant. The obvious one is lower costs, reduced effort, and improved efficiencies, even as trading volumes and product variety increases. Automating processes such as affirmations and confirmations facilitates high volumes, at close to real-time, and reduces the need for manual remediation processes. In turn, automation frees specialist teams to focus on increasing profitability.
By reducing settlement uncertainty, a landscape in which risks can be recognized and mitigated, and arbitrage or trading opportunities identified early is created enhancing inventory management and risk management.
To date, the energy market has too often held back, believing that the complexity of the data and the unique workflows that come with energy trading are a barrier. A crude oil contract, for example, includes not just the volume and price agreed, but specifications for the quality, information on agreed delivery date and time, including the port and even the ship for transport, alongside complex provisions for failure to meet the contract. That’s multiple data points, which may be expressed differently depending on the counterparties. The workflow for this trade will also be entirely different to the workflow for a series of trades to manage currency exposure that results from the oil being extracted in one place, transferred to another and refined in a third.
But to data automation specialists like Xceptor, data is data, even the most complex and unstructured data. Identifying relevant data points in a contract and producing a short-form confirmation or recap is possible no matter how complex, detailed, or variable the underlying contract may be. This has allowed us to provide automated post-trade data management to some of the world’s leading energy trading firms as they implement automatic processing of short- and long-form confirmations and contracts across energy assets and financial instruments.
In a recent case working for Standard Bank International, their head of Confirmations said,
“Using Xceptor we’ve been able to streamline our trade confirmations process, taking cost out of the business and establishing better control over our derivatives operations. The original project was completed in just a few short months creating a real value-add for Standard Bank’s international business.”
Leverage automation to transform energy markets
There is no doubt that implementing the right data management and automation processes can transform energy trading, bringing it up to speed with other financial markets. Governments, regulators and consumers are heavily invested in effective, cost-effective energy solutions, with a focus on sustainability. Energy market players who leverage technology and automation can better manage all aspects of their trading, from the practicalities of physical energy trading to risk management and inventory management, to identifying speculative or profit-making opportunities. Those who don’t will rapidly fall behind.
Learn how Xceptor can revolutionize energy trading confirmations: