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Turmoil in Financial Markets Linked to Energy Pricing

Impact of Financial Market Turmoil on Energy Markets— Why Energy Prices have Fallen while Electricity Prices have not …. Turmoil in Financial Markets Linked to Energy Pricing. There are Concerns Regarding Credit Worthiness of both Energy Suppliers and Customers

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Turmoil in Financial Markets Linked to Energy Pricing

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  1. Impact of Financial Market Turmoil on Energy Markets—WhyEnergy Prices have Fallen while Electricity Prices have not…

  2. Turmoil in Financial Markets Linked to Energy Pricing • There are Concerns Regarding Credit Worthiness of both Energy Suppliersand Customers • Some may be surprised to know large Role of Financial Houses in Energy Markets • Expansion of Energy Supplies Dependent On Large Commitments of Capital – Without access to capital many projects may be delayed, for example: • Oil & Gas Drilling and Development of New Fields • Construction of New Electric Generation • New and Expanded Transmission Facilities • Advanced Metering & “Smart” Grids • Upgrading Other Existing Infrastructure AOBA Utility Committee

  3. Credit Concerns Impede Energy Transactions • Meanwhile, the number of credit worthy wholesale energy suppliers has shrunk. For example: • Constellation Energy - Financial Trouble and Pending Sale • Post-Bankruptcy Mirant • Merrill-Lynch takeover by Bank of America • Lehman Brothers Bankruptcy • Wholesale suppliers are becoming less willing to extend credit to retail energy marketers without collateral • New collateral requirements raise retail costs of energy supplies, even though energy commodity costs have declined AOBA Utility Committee

  4. Financial Houses Have Played Key Role in Energy Markets • Several investment firms assumed roles as wholesale energy suppliers • Since 2004, financial firms have become increasingly active in energy markets • In 2004, None were in the Top 25 U.S. Gas Marketers • By the 2nd Quarter of 2008, Four were among Top 15 U.S. Gas Marketers • Some were key facilitators of hedging transactions for energy suppliers • Some were providers of asset management services AOBA Utility Committee

  5. Influences of Financial Markets on Energy Pricing • Energy pricing problems have been fueled by Speculative Trading of Energy Futures • Declining Value of the US Dollar contributed to rising energy prices • Turmoil in Financial Markets Slows Economic Activity and Makes Energy Trading More Difficult AOBA Utility Committee

  6. Speculative Trading Fuels Energy Market Price Volatility • Declining Returns on Equity Investments Fostered A Large Short-term Migration of Investment Funds into Commodity Futures • Current surge in Energy Prices Cannot Be Sustained…Why? • Rapidly Rising Energy Costs Quickly Impact Economic Activity • Adverse Economic Impacts of Higher Energy Prices Reduce Energy Demand • Prices Decline in the Face of Substantial Price Increases AOBA Utility Committee

  7. Crude Oil Goes “Contango”Futures Prices Are Now Higher for More Distant Time Periods AOBA Utility Committee

  8. Examples of Natural Gas Price VolatilityJan 2009, Jul 2009, Sep 2009 & Dec 2009 January 2009 July 2009 September 2009 December 2009 AOBA Utility Committee

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