Risk Management Tops Trading Firm's Critical Business Issues in Less Liquid Energy Commodity Markets

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A recently completed study of the energy commodity trading markets by CommodityPoint, a division of UtiliPoint® International, Inc., shows that tighter credit, decreasing market liquidity and related developments are being felt by, and are creating serious issues for, increasingly cautious trading firms. The survey quite clearly indicates that many traders are finding current conditions difficult, to the point of reducing their exposures, both volumetrically and financially, and in some instances, exiting the markets altogether.

CommodityPoint, a division of UtiliPoint® International, Inc., has released a new report titled "Changes in Commodity Markets - Impacts on Traders and Software" based on a survey of a variety of energy commodity market participants. While commodity traders face a barrage of issues as a result of the ongoing financial and credit crisis, the study indicates that risk management is the most critical business issue facing those market participants.

The study, based on a global survey of 65 firms trading commodities (and follow-up interviews with many of the survey respondents and other market participants), shows that tighter credit, decreasing market liquidity and related developments are being felt by, and are creating serious issues for, increasingly cautious trading firms. The survey quite clearly indicates that many traders are finding current conditions difficult, to the point of reducing their exposures, both volumetrically and financially, and in some instances, exiting the markets altogether.

The results also indicate a growing divergence between the physical and financial players in the markets. In the period of rapidly escalating prices prior to July of 2008, financial traders were entering the markets in large numbers, bringing with them new strategies and trading styles, and catalyzing growth not only in traded volumes, but also in the introduction of new products and instruments. The survey respondents indicated that for many of the physical players, while these new market developments provided some benefit, such as access to new trading partners and improved liquidity, there has also been some detrimental impacts, the most cited of which is the lack of clarity around price formation.

"A key finding in this study is related to the impact that financial commodity traders may be having on price formation," said Dr. Gary M. Vasey. "Understanding factors behind price formation was cited as a key concern in the study which appears to indicate that financial traders trading styles, strategies and overall portfolio make-up can have a definite impact on price formation."

"Additionally, the study indicates that while uncertainty surrounding price formation is a concern for all traders, physical traders, and particularly those that have naturally long or short positions such as producers or industrial scale consumers, are faced with unique concerns." said Patrick Reames. "These companies are having a very difficult time developing and executing hedging strategies in light of the extreme levels of uncertainty around future prices."

The new report, "Changes in Commodity Markets - Impacts on Traders and Software" examines a broad array of issues faced by the industry and provides particular focus on those issues considered critical to market participants, both in terms of business strategy and the implications for the systems and software deployed to support those businesses. The report is available for purchase at UtiliPoint's website at http://www.utilipoint.com

About CommodityPoint
CommodityPoint is a division of leading energy and utilities analyst and consulting firm, UtiliPoint International, Inc. CommodityPoint provides Commodity Trading & Risk Management (CTRM) research, analysis and consulting services. Our services bring insight into business issues, trends, processes and technology, to energy companies, utilities, banks, brokers, funds, investors and vendors, enhancing their competitive position and supporting critical business decisions. CommodityPoint has been formed to bring focus and clarity to the broad array of issues surrounding the wholesale trading of commodities. Our team provides expert analysis of market trends and, in particular, the technologies and applications supporting those that participate in regional or global commodity markets. Our principal analysts, Dr. Gary Vasey and Patrick Reames, bring years of practical experience to their roles. With offices in the US and Europe, and backed by an experienced research team, our organization provides an unparalleled view of the marketplace.

About UtiliPoint® International, Inc.
UtiliPoint is a leader in providing analysis and consulting services to the energy and utility industry. Our 76-year history and over 500 clients worldwide have led us to currently operate as an energy and utility consulting and issues analysis firm. Our staff is comprised of leading utility and energy experts with diverse backgrounds in utility generation, transmission & distribution, retail markets, mergers and acquisitions, new technologies, venture capital, information technology, outsourcing, renewable energy, regulatory affairs, and international issues.

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