Welcome to Mobius Risk Group.
The market response to changing capital requirements for banks and increased regulatory reporting obligations (Dodd Frank) are changing the nature of capital in the commodity space and in the energy landscape in particular. Private equity firms are substantially increasing their presence as capital providers in energy, banks are leaving the space as viable hedging counterparties, and there is increasing emphasis on counterparties that also have physical capabilities. These evolving changes are reflected in less market transparency, changes in liquidity in various parts of the curves for different instruments and increased volatility in basis markets (natural gas and crude in particular). The shifting of volatility from the exchange traded contracts to the basis/grade differentials will continue as a result of the aforementioned changing nature of capital as well as the increase in midstream capital being deployed.
The proliferation of midstream MLP’s has brought a broader pool of capital to be invested in these areas of “inflection” and will eventually result in a more efficient energy infrastructure which can respond to changing price and operational signals more rapidly. However, these infrastructure opportunities are longer dated and create a bit of a duration mismatch in today’s North American commodity and energy portfolios. For example, shale technology has greatly shortened the duration on the energy production curve.
While there are environmental, likely more expensive borrowing environment and good business practice issues that will have impacts on the delivery cost structure of North American shale plays, the technology and its continuing innovations have greatly reduced the risk, cost and time required to deliver molecules thereby reducing the duration of North America’s energy production portfolio.The means to deliver these molecules to domestic and emerging export markets require a decidedly longer duration capital and construction cycle than the marginal unit of supply that can come to market. This duration mismatch is reflected in basis markets and in various parts of the forward curve of underlying instruments (nat gas, ngl’s and crude). The durational spread will continue to narrow as capital is deployed and projects come to market. As the market matures we will experience more trend based pricing with shorter periods of extreme volatility (see natural gas prices in delivered Midwestern and Northeastern markets in the winter of 2014).
In order to meet debt covenants and deliver on business plans in the current marketplace, companies require a more robust tool set that includes the ability to access physical markets, increased reporting capabilities and the ability to level the playing field through objective, non-conflicted advice and execution in financial and physical markets.
I look forward to exploring how we can assist you in becoming more strategic in your commodity and energy matters as well as delivering the entire value of your plans through effective and non-conflicted market execution services.
Eric J. Melvin