The move by banking and securities regulators to ban proprietary trading at financial institutions could put an end to Wall Street’s dominance in the commodity hedging game, giving greater advantage to oil majors, but make it difficult for smaller oil and gas producers to lock in future prices to mitigate risk, industry experts say.
The tougher trading regulations, known as the Volcker Rule, were finalized on December 10 by banking and securities regulatory agencies, and will prohibit proprietary trading by banks with the end goal of drawing a line in the sand between commercial banking and investment banking. The Volcker Rule, implemented in the wake of the financial crisis and named after former Federal Reserve Chair Paul Volcker, is being viewed by some as a major coup in commodities trading for non-banks, including oil majors and commodity trading houses.
The new rules should be favorable for oil majors and large trading houses because the Volcker Rule does not apply to them, according to Risknet.com. On the new commodities playing field, experts are predicting that we will see more hedging with oil giants and major trading houses like Vitol. At the same time, small and medium-sized oil and gas producers could take a hit.
“The Volcker Rule isn’t a frontal attack on exploration and production companies, but the secondary effects could make it much more expensive and restrictive for them to enter into these financial instruments,” the Houston Chronicle quoted Ernie Lachica, a Houston-based principal of UHY LLP who specializes in hedging and trading, as saying. “It could put constraints on the overall energy industry.” The end result could be higher costs and less liquidity for smaller producers, he said.
While banks may have been wrong-footed in the deal, they were already inching out of commodities trading before the December 10 decision. According to earlier media reports, on December 5, Deutsche Bank (NYSE:DB) said it would downsize its commodities trading due to expected regulatory changes, and earlier in July, JPMorgan (NYSE:JPM) announced plans to spin off its physical commodities trading, while Morgan Stanley (NYSE:MS) is also said to be considering pulling back a bit.
Originally written for OilPrice.com, a website that focuses on news and analysis on topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.