Oil Hedging Seen in Decline as Banks Exit Commodities

Oil-price hedging by producers and consumers is declining as a result of stricter of regulation that’s caused banks to exit commodities markets, according to Threadneedle Asset Management Ltd.

Trading of futures for delivery later this decade has diminished as some banks either leave commodities altogether or curb trading, Nicolas Robin, a fund manager at Threadneedle, said at a presentation in London yesterday. Increased regulatory oversight has caused a slump in energy trading on exchanges, Platts, a company publishing prices for commodities including oil, said the day before.

Banks including Barclays Plc, JPMorgan Chase & Co. and Morgan Stanley reduced their commodity businesses over the past several years as returns declined and regulation intensified. While most crude-futures trading centers on prices for immediate supply, known as the front-end of the oil curve, companies producing and processing crude also hedge prices for supply several years in the future.

“The back end of the curve is becoming less liquid,” Robin said at the presentation, adding that the banks still operating in commodities have curbed their activities because of stricter rules. “Because of the changes in regulation, we think this change is permanent.”

Less Liquid

New regulations including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Volcker Rule restrict banks from trading for their own account and expanded oversight of commodities derivatives. The producers and consumers those rules were created to protect are now saying that markets are less liquid and it’s harder to hedge, Jorge Montepeque, global director of market pricing at Platts, said at a conference in Tokyo on July 8.

Platts, a unit of New York-based McGraw Hill Financial Inc., competes with Bloomberg LP and other companies in providing energy markets news and information.

The amount of light, sweet crude futures handled by CME Group Inc., the world’s largest derivatives exchange, slumped 22 percent to an average of 489,658 contracts a day in May from a year earlier, the bourse’s data show. Natural gas trades fell the same amount. Brent crude transactions on Intercontinental Exchange Inc. were 9 percent fewer in the first six months than the same period in 2013.

“Liquidity is drying up out of the curve,” Jim Newsome, founding partner of Washington D.C.-based Delta Strategy Group, who has served as chairman of the Commodity Futures Trading Commission and chief executive officer of the New York Mercantile Exchange, said by phone on June 23. “You’ve got fewer banks willing to do the business, and you’ve got hedgers that are just doing less hedging because of the cost.”

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