A new Greenwich Associates study of corporate strategies for managing energy prices exposure reveals that Goldman Sachs and Morgan Stanley dominate global energy trading due to the breadth and consistency of their service quality.
'Goldman Sachs and Morgan Stanley's superior product platform, service levels, and unwavering commitment to the commodities business over the years has put them at the top,' says Greenwich Associates consultant Giovanni Carriere. While their dominant position is not currently endangered, some lower tier energy derivatives players are using lending capabilities to strengthen/expand their trading relationships.
Almost 40% of the companies in North America, Europe and Asia identified as active users of OTC energy derivatives use Goldman Sachs as a dealer, while Morgan Stanley has achieved a market penetration of 35%, according to the results of the 2007 Greenwich Associates Energy Trading Research Study. Barclays Capital is also broadly used, ranking third in franchise size with 27% of the study's product users citing the firm as one of their counterparties in these products.
Although Goldman Sachs and Morgan Stanley are strong globally, the picture does change on a regional basis, with Barclays Capital essentially tied with Goldman Sachs for the lead in market penetration in Europe. 'Goldman and Morgan Stanley are also the clear leaders in customer ratings of service quality on a global level,' explains Greenwich Associates consultant Frank Feenstra. 'The companies participating in our 2007 study award Goldman Sachs and Morgan Stanley the market's highest ratings for overall quality and franchise strength, with JPMorgan third.'
In the business of executing customers' orders in listed derivatives, Goldman Sachs is again the clear leader. Among firms offering risk management capabilities, BNP Paribas has gained top status in exchange-traded energy derivatives, and deals with almost one in five among the companies using these instruments - trailing second-ranked Morgan Stanley by a modest margin.
Of the 287 companies interviewed by Greenwich Associates for the study, 58% say they currently have exposure to natural gas, 48% to electricity, 47% to refined oil and 43% to crude oil.
On average, the companies participating in the research hedge 48% of their physical sales or purchases of energy. European participants hedge the highest proportion of their physical sales at 63%, followed by companies in the United States at 50%. 'Companies broadly categorized as energy 'consumers' hedge an average 55% of their exposure, while 'producers' hedge about 40% - hardly an unexpected difference in light of increasing energy pricing,' notes Greenwich Associates consultant Woody Canaday.
In addition, the data reveals significant variation in hedging strategies on a case-by-case basis. When asked how they plan to change their hedging practices in coming months, 22% of participants say they expect to increase the proportion of total energy exposure hedged, while 12% plan to decrease it. 'These results suggest that significant numbers of companies expect to hedge more actively, while a smaller cohort plans to reduce the proportion of hedged exposures by a considerable amount,' says Greenwich Associates consultant Peter D'Amario.