June 2, 2021Commodity traders crave volatile markets, and they’ve had their fair share of them recently:

  • A snowstorm spurred dramatic price spikes in electricity in Texas in February, with clearing prices up to $9,000 per megawatt-hour (MWh) for three days, more than 300 times the average February price of $21 to $27 per MWh.
  • The grounding of a giant container ship in the Suez Canal produced a 6 percent jump in daily oil prices. The cost of renting tankers from the Middle East to Asia also rose by up to 47 percent within three days, with ships immobilized or taking longer trade routes.
  • In Asia, liquefied natural gas (LNG) prices reached about $20 per million British thermal units (MMBTU) in January 2021, a record, compared with a 2020 average of about $6 per MMBTU, prompting large Asian buyers to explore new long-term contracts to avoid overexposure to the volatile spot market.
  • In Germany, increasing supply of prioritized renewable energy has led to a surge in hours of power supply at extremely low prices, from about 200 hours with prices below €5 per MWh in 2016 to about 600 hours in 2020.

Volatility is normal in commodities markets. But energy and commodities companies, including utilities, industrial firms, and trading houses, are now dealing with higher frequency of extreme events. They face four big fundamental changes in the markets. First, energy markets in particular are becoming more globally interconnected. For example, LNG prices are increasingly connecting major global gas markets to each other1. Similarly, European power and gas trading hubs are increasingly correlated from north to south and west to east, progressively transforming what used to be to a collection of local trading hubs into a more regional market. Second, markets are trading […]