The Speculators.

Following in the footsteps of big hedge funds, several European and US banks have recently moved into the energy trading business or have taken steps to expand their involvement in oil, gas and power derivatives. They have been raising their profile in commodity derivatives over the past two to three years, capitalising on their credit worthiness and on the relative profitability of commodities-based investments as more traditional markets like equities falter.

Major fuel users like airlines have been reviewing their hedging policies in the face of accelerating costs and shrinking profits. Banks, as well as hedge, pension and leverage funds, are looking to cash in on increased customer demand for financial instruments aimed at offsetting any future shocks in energy prices.

ABN AMRO recently announced it had recruited a team of senior energy traders from rival banks to bolster its derivatives operations in London and New York. The bank on Aug. 24 said it had recruited top talent from BNP Paribas, Tokyo Mitsubishi and Deutsche Bank. Wayne Harburn, brought in earlier in 2004 to commodity derivatives trading at ABN AMRO, was quoted as saying: "These hires kick-start our intention to build a market leading global energy derivatives platform, providing advanced hedging and risk management services for corporate clients, as well as sophisticated commodity-based investment products for institutional and private investors".

Dresdner Kleinwort Wasserstein (DKW), the investment trading arm of Dresdner Bank, in July said it was getting into energy trading with the formation of a new London-based business. DKW said it had hired Neil Rothwell, formerly with RWE, as managing director and head of commodities with a brief to set up the energy trading operation over the next six to 12 months. Barclays Capital, already active globally on oil derivatives markets, is moving into the US power market. "US power is our most recent investment", Benoit de Vitry, global head of commodities for Barclay Capital told Reuters in August. "We started trading financials in May and by the end of the year we'll also engage in physical power and gas trades in the US".

Merrill Lynch, which sold its energy-trading unit to Maryland-based Allegheny Energy in 2001 for $490m, is to get back into the business. Its CFO Ahmass Fakahany has described commodities as a "missing piece in the jigsaw", adding: "It's important to be in it and participate in that asset class ... if you look at our results this quarter, certainly if we had more of a commodities presence we would have benefited from that". Credit Suisse First Boston unveiled a 50/50 JV with Texas-based utility TXU Corp in May to be the exclusive power trading and marketing vehicle for both companies in North America. The new entity is to begin trading power in the early autumn and later to expand to trading gas and other energy-related commodities in North America.

The newcomers are seeking to challenge the traditional dominance in energy and commodity markets of the two Wall Street giants, Goldman Sachs and Morgan Stanley. GS last year added to its energy portfolio when it bought El Paso Corp's interest in East Coast Power for $456m. It also bought private US power producer Cogentrix Energy, adding 26 power plants and 3,300 MW of generating capacity to its existing assets, also purchasing the trading books of Dynegy Inc.

Deutsche Bank is the biggest player in a second tier of global banks seeking higher market share in energy. Barclays Capital, Citibank, Bank of America, Societe Generale, BNP Paribas, UBS Warburg and Credit Agricole unit Calyon are the other main players in this category.

Because the bubble is so big, its players raise or lower WTI/Brent by $1-2/b after every positive or negative event. Thus oil prices have become excessively volatile which is ideal in the hedging business. On Aug. 26, October WTI closed at $44.10/b, having fallen to $42.50 earlier in the day, as sabotage in southern Iraq caused oil exports to fall by half from 1.8m b/d. On Aug. 20 it peaked at $49.95. October Brent settled at $40.27/b, having plunged to $39.67 earlier in the day.