For much of the world, the extreme volatility of the energy markets over the last few years has caused considerable frustration, anxiety, and even energy poverty. But for energy traders, things have never been better. A volatile market is music to an energy trader’s ears, and many of them have made more money than ever in the whiplash environment of the last few years thanks to covid-19, Russia’s war in Ukraine and its resulting sanctions and retaliations, and all kinds of extreme weather events.
Even before the invasion of Ukraine, which sent European energy markets – and, as a result, many other markets around the world – into crisis, energy markets were in a huge transition period which had traders’ mouths watering. A 2021 McKinsey blog laid out four fundamental changes to the energy market that would ultimately be a boon for commodities trading: increasing globalization of energy markets, trading becoming more and more instantaneous and real-time, increasing automation, and the rise of new commodities thanks to the green energy transition and environmental movement as a whole (such as biofuels, renewables guarantees of origin certificates, lithium, and cobalt).
All of these factors influenced how rapidly and completely the energy war between Russia and Europe ripped through the global economy. It also influenced the incredibly rapid rise of green energies in many of the markets hit hardest by the energy crunch. Even some of the most unlikely, fossil fuel dependent candidates – looking at you, Poland – were able to pivot toward renewable energies in record time.
The war also sent energy markets in new and unpredictable directions. After years of a steady trend toward increasing global energy market interconnectivity, we are now seeing a wave of protectionism and “friend-shoring” instead of free-market trading. This means that in the context of this current conflict, many countries are shifting supply chains to “trusted countries” with similar values and political allegiances. “Staking out spheres of influence and assessing the reliability and trustworthiness of suppliers and countries is the order of the day,” read a recent analysis from Stiftung Wissenschaft und Politik, the German Institute of International and Security Affairs.
All of these changes are creating unprecedented uncertainty for the global economy and brutal price fluctuations of all kinds of goods and services for consumers. But for energy and commodities traders, there’s nowhere to go but up. Now that energy traders are flush with cash after the last few years, they’re looking for their next big opportunity. And for many, that has meant moving into metals and agriculture, two booming industries for trading now that everyone in the world is scrambling for battery metals in clean energy supply chains and fertilizer costs have shot through the roof. Wheat trading, too, faces continued volatility as the world’s bread basket remains under siege.
“The energy crisis and Russia’s war in Ukraine fueled volatility that traders crave and underscored how one commodity can impact another — such as high gas prices curbing metals output and boosting fertilizer costs,” Bloomberg recently reported. “Plus, metals like copper and lithium are crucial to the energy transition away from fossil fuels and a US renewable diesel boom is boosting crop demand, helping to connect commodity markets.” What’s more, for those who did lose money in the crash of Russian oil and gas exports, diversifying into these new markets provides a promising way of recuperating those losses.
This isn’t the first time that energy traders have tried to move into these markets, however, and past attempts haven’t gone too well “with Vitol and Gunvor both winding down forays into agricultural and metals markets more than six years ago.” What’s more, many experts believe that the race for battery metals essential to clean energy and electric vehicles supply chains, such as lithium and cobalt, are extremely overhyped. The current rush of investment may be undermined by the increasingly vocal assurances from scientists that we aren’t running out of these materials any time soon. At the same time, if we’ve learned anything at all, it’s that traders love a bubble, and will find a way to cash out either way.
By Haley Zaremba for Oilprice.com
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As was the case in energy, changes in the global commodity markets will raise structural volatility, disrupt trade flows and lead to higher prices, shortages and also volatility thus creating a profit opportunity for commodity traders.
Energy traders, for instance, have made huge profits off the volatility in oil, LNG, and coal markets in 2022. Now they are betting on volatility in agriculture and metals as well.
And with China’s economic rebound and the projection that China’s economy will grow by 6.5% in 2023 and also help the global economy gain 1%, demand for energy, agricultural products, metals and all other commodities will increase leading to rising prices, volatility and more profits for commodity traders.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert