A Changing World and Commodity Trading
There is little doubt that the world is currently experiencing change at a rate that has never been witnessed before in history.
30 years of relative calm (terrorist attacks, 2 gulf wars and Afghanistan aside) were well and truly broken by a couple of dodgy bats in a Wuhan warehouse and the world seems to have been speeding away from most peoples version of normality ever since.
Covid sparked a huge inflation spike and then Vlad literally poured petrol on the fire with his invasion of Ukraine.
As well as the cost of living crise and a K shaped economy in much of the developed world, we now have AI and the Middle East Fluster Cluck to deal with. We are suddenly in a very polarised world where no one has any real clue about what the hell comes next and people are understandably worried.
For European Gas and Power traders the direction of travel is also certain. 2021 and 2022 bought massive riches, but also signalled the end of a fundamental market where any decent shop could have a good grasp of balances and the eventual price. That certainty was replaced by a global market, with LNG as the marginal therm and an enormous amount of new entrants, many of whom were not human.
The best illustration of the change in market dynamics came earlier this year, when 20% of Ras Laffan got taken out by the Iranians and after an initial price spike, the TTF got absolutely levelled for about 3 weeks!! No one has offered me a decent explanation as to what the hell happened in the aftermath of that attack, but it was in very stark contrast to how the market had reacted 5 years earlier.
July and August allowed the old school gas market to enjoy some what of a renaissance, especially if you enjoy being bullish!! We enjoyed a strong upward trend for a prolonged period with winter fast approaching and Europe woefully short of storage cover, two wars raging and infrastructure being targeted daily.
I would argue that the recent up move is still fairly muted compared to the past. By next April I will be able to tell you if that muted reaction is a good thing and is because the European Gas market is now way more efficient. The alternative scenario is that the new entrants and our robot friends are massively under pricing risk and things go very Pete Tong this winter!
Putting the current mess to one side for a minute, it seems that trading companies are approaching the new world in 3 distinct ways:
1. Traditional trading houses and many funds (big and small) seem to think this polarised world is here to stay and are focussing their efforts and money on assets and physical desks. A simple but effective method that has stood the test of time and looks very likely to still be effective through this next revolution at least and possibly forever.
2. Invest in AI, streamline processes, improve analytics and gain a competitive advantage against companies that are slow to react. I am seeing the AI revolution in companies both small and big, with the smaller firms now levelling the playing field against overweight behemoths and the bigger firms stealing a march on their rivals with AI labs and some pretty cool kit.
3. The last modus operandi I am witnessing is companies that have so far decided that nothing is broken and things are ticking along nicely just the way they are. Spreadsheets work just fine and for anyone with ambition, Copilot and a few Claude tokens will be more than sufficient.
My favourite approach would undoubtedly be a hefty combination of numbers 1 and 2 were possible and for smaller non-physical shops, number 2 has to be a must.
Trading companies that continue to choose option 3 are probably going to spend much of the next few years hankering after the good old days, while engaged in a very difficult game of catch up.