Energy Trading: Mitigating Risk Through Real-Time Data

Daily life in this modern age of automation is ruled by the energy industry, from manufacturing and food production to heating homes and driving cars. But what supplies the power to the industry that powers the world? That is, how are energy companies deciding how to grow and evolve to continue to support the changing needs of their customers?

And with that, how are the traders, whose opinions and actions derive the value of energy companies coming to arrive at market-driving decisions? Quarterly earnings, stockholder meetings and conferences are scheduled and important ways to stay up to date on the latest developments, but what about unexpected, moment-in-time events?  With the constant race for an edge, traders are looking to new ways to stay ahead of the market and alternative data sources are increasingly providing the behind the scenes power that fuels the energy industry.

Times are Changing

The energy industry is in the midst of a major transition. Technology is changing, and there is a strong appetite for the exploration of and expansion into alternative fuel sources that drive down the carbon footprint of companies and individuals. Energy companies are increasing investment in research and development, and looking towards market consolidation in an effort to keep pace with the buying public, and shore up their futures as multifaceted providers of a broad range of energy services.

In a literal exemplification, on May 15, 2018, oil giant Statoil ASA changed its name to Equinor ASA (OSE: EQNR, NYSE: STO), a move heralding a vocal, public statement that this is not a company whose business solely relies on oil. The new nomenclature signified a strategic change toward a future with a diversified business, which has the potential to draw and benefit from a broader set of available energy sources. Chairman of the Board, Jon Erik Reinhardsen said in a statement, “The world is changing, and so is Statoil. The biggest transition our modern-day energy systems have ever seen is underway, and we aim to be at the forefront of this development.”

It’s not just lip service; the importance of alternative energy sources, and particularly renewables, to the strategic growth of the organization served as the driving force behind the name change, “Statoil is building a material industrial position within profitable renewable energy, and expects to invest 15-20% of total capex in new energy solutions by 2030,” said Reinhardsen.

Similarly, French oil company Total (TOTF.PA) has entered into an agreement to buy Direct Energie, an electric and gas supplier operating in France and Belgium. Total had previously outlined its ambition to increase its low-carbon energy assets to 20 percent by 2035, from the 5 percent it holds today. This move paves the way for Total to shift its business and accelerate its ability to make good on that promise. “This friendly takeover is part of the Group’s strategy to expand along the entire gas-electricity value chain and to develop low-carbon energies, in line with our ambition to become the responsible energy major,” said Patrick Pouyanné, Chairman and CEO of Total.

Alternative Data Landscape

The emergence of alternative data sets has opened up a brand new world of news and commentary. Data is everywhere in this digital age, and much like technology has forced the energy companies to evolve, so too has the influx of data available through digital technology required the same of their energy trading operations.

Alternative data sources, including weather patterns, traffic reports and satellite images, are now being collected and analyzed to provide a deep level of understanding into the external factors impacting the energy sector. The status of materials, production and the supply chain, as well as how each may radically change in a moment’s notice, can all be monitored with alternative data providers. But, the data itself can be thought of as “unrefined” crude oil, still needing to be processed into usable materials.

Given that the energy industry is susceptible to a great number of outside forces, including common issues like an incoming storm or production interruptions, the challenge lies in being able to draw from a vast set of raw data and “refine” it into usable materials, namely pertinent and impactful information that can be easily digested to quickly inform trading decisions.

Digital technology has made information gathering largely egalitarian, with essentially the same information available to all. But, the most successful energy traders are those who have identified a process for unearthing the specific types of data that then become trading signals. Those that rise above the rest are capable of isolating specific and meaningful events and responding quickly, ensuring their investments are poised for the best return.

Real-Time Data for Energy

The capability to gather alternative data intelligence and its direct impact on determining value has real meaning for trading in the energy space, which is vulnerable to a multitude of extrinsic conditions. News breaks quickly, and social media has provided a broadcast medium that can reach billions in the blink of an eye. Energy professionals are now in need of technology that instantly detects breaking news in order to make rapid decisions that impact their industry position.

For example, an explosion ripped through a major natural gas facility in Austria in December 2017, killing one person and injuring more than a dozen others. The news first broke on Twitter by an eyewitness who had snapped a photo of flames in the distance. The event impacted gas supplies across Europe, and news of the explosion sent gas futures soaring.

When energy professionals can’t attend global industry events in person, they can sometimes rely on attendees who share photos and quotes on social media in real-time. As an example, on January 31 2018, a permit for construction and operation was granted to Nord Stream 2, a gas pipeline project that will connect Russia with Germany in German territorial waters. A day before its approval, an industry executive argued that the proposed pipeline would be positive for Europe during a speech at the European Gas Conference. Shortly after, a Tweet in Russian surfaced with information about a forthcoming approval. This decision will have long-term impacts on the European natural gas industry and put pricing pressure on liquefied natural gas suppliers globally, as this new supply comes on line in 2019.

Diversification for the Future

Every day, energy market professionals require access to breaking news and information to make rapid decisions that impact their infrastructure, supply chain, assets and investments. Both the energy industry, as well as its trading sector, are undergoing a time of rapid revolution. The standards are changing and requiring organizations to be nimble and diversify. For energy companies, this means expansion into renewables; for traders, it means looking to alternative and real-time data in valuing those companies. For both, only those organizations that learn to grow, adapt, and take full advantage of the free flow of information now available will give themselves an edge and strengthen their respective positions.

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