Barclays' exit from energy trading stirs concerns over liquidity

Tue Dec 6, 2016 5:31am EST
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By Catherine Ngai and Olivia Oran

NEW YORK (Reuters) - British bank Barclays Plc has joined the list of top banks to exit energy trading, an exodus that analysts say raises concern among oil producers that falling liquidity means they cannot use derivatives for their basic function: to hedge risk by locking in future prices.

Wall Street firms have scaled back in commodity markets since the 2008 financial crisis from owning physical assets or taking positions in the market in the face of regulatory scrutiny. The banks were big players in the market for derivatives years into the future.

The departure of Barclays exacerbates the scarcity of counterparties for trade when producers are trying to hedge their production for 2018 and beyond, potentially raising the cost to lock in that output.

That increase could force cash-strapped producers to forgo protection altogether, putting them at risk if the market takes another leg down.

Some producers seek to lock in future profits and fund expansion through selling as much as 80 percent of production years into the future.

"It's one less bank willing to make a trade in the market, which reduces liquidity overall. That's one less source of credit and one less counterparty," said John Saucer, vice president of research and analysis at Mobius Risk Group.

On Thursday, Barclays said it would close its energy business within the 'Macro' trading division, according to an internal memo obtained by Reuters, a move to better maintain resources. They follow a string of other big banks who, with profits hampered by toughening financial regulations, have chosen to exit.

Executives and traders within the industry said that Barclays' move was not surprising as it had been scaling down in recent years. But it represents the departure of another former top-five player from the energy space. Other big players who have already exited the market include RBS Sempra in 2010 and Deutsche Bank three years ago.   Continued...

A view of the exterior of the Barclays U.S. Corporate headquarters in the Manhattan borough of New York City, May 20, 2015. REUTERS/Mike Segar