Transparency in Trading: Margin Erosion or Profit Opportunity?

     


In oil and gas trading (and many other types of Energy trading), the description of legendary 80s arbitrager Ivan Boesky holds partial truth today. Boesky — the inspiration for Wall Street’s Gordon Gekko character — was said to have had the hide of a rhinoceros and the nerve of a burglar.

Fast forward a few decades, and the need for a rhinoceros hide in trading is an absolute must. Commodity trading in the energy ecosystem requires a delicate balance supported by thick-skinned traders who seem to naturally be able to account for global dynamics. However, with newer, sophisticated technologies, expanded data sets, and more transparency, some traders bemoan shrinking margins. No longer can pricing be based on expectations.

According to a Bloomberg report “For commodity traders operating in the Information Age, just good old trading doesn’t cut it anymore”. The more transparent the deal, the more profits erode arbitrage trades.

But for every glass-half-empty perspective, there is a contrarian Gordon Gekko side that believes “the most valuable commodity I know of is information.”

Leading management consulting firms echo this mantra. Accenture states that leading S&P companies stand to gain up to 38% in revenue increases with artificial intelligence investments. Deloitte says digital technologies for oil and gas could change everything, resulting in radical efficiency gains and improvements of both top and bottom lines. However, information technology presents a challenge for oil and gas. Its digital maturity is one of the lowest as compared to other industries, focusing its attention on individual operational technologies and strategies.

True transparency means harvesting information outside of a company’s control to provide real-world dynamics — like weather and political positions, to name a few. Profits can change with a region’s late spring blizzard or threats of forthcoming trade tariffs on consumer products. So why does information transparency often meet resistance? It comes back to the rhinoceros hide.

Only the tough have been able to break away from traditional oil and gas trading practices and embrace technologies that provide a transparent ecosystem; one that utilizes internal and external data sets, optimizes trading, and includes accurate financial data in the optimization process. All of which in turn sow opportunity instead of margin erosion.

Improving the Profitability of Trade with Prescriptive Analytics

Even if you’re not too familiar with prescriptive analytics, you can probably guess what it is: forward-looking insights into your data that prescribe a course of action. Many Energy companies have begun using prescriptive analytics in their trading operations, given the highly dynamic market space and the need to be more innovative in trading technologies. 

Prescriptive analytics is the single best way for traders to get true transparency into trading operations and understand certain tradeoffs that are pulled in from your Energy Trading & Risk Management (ETRM/CTRM) System — things like the portfolio of assets, contracts, position, risk, settlement, etc. Prescriptive analytics provides insights into things like:

  • Least cost routing, utilization of transportation assets, and agreements
  • Optimal purchase, sales timing, and locations
  • Optimal inventory positions
  • A forward view of portfolio without having to schedule the activity in your ETRM 

True Transparency is All-Inclusive, Not Selective.

Truly transparent information provides the edge needed to survive eroding margins, especially for traders who are ready to map out more complex, multi-dimensional views. Weather. Politics. Alternative Fuels. New environmental rules. Taxes and tariffs. Over-the-counter trades. Floating prices. Timing, delivery, origination, and destinations. One trade. Seemingly infinite considerations.

While transparency may erode margins from the viewpoint of some, true transparency provides the opportunity to improve profits, margins, and revenue growth. It also eliminates the need for the ‘nerve of a burglar’ because of its reliable accuracy.

 

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