How is ESG affecting Oil Trading?
Sorry if I seem naive, I am new to the space.
I know oil is a necessity, but the general consensus (however factually correct it is) is that companies are trying to move away from oil as an energy source into more green energy.
1) Will this screw major oil traders like Shell/BP or Prop Shops that trade oil derivatives?
2) Will there be new financial instruments for green energy, or does the fact that it’s not really a physical energy resource mean no?
thank you
1. Nope. The best traders can make money regardless of whether the market is going up or down. If you think oil will collapse in price due to ESG funds then just short oil.
2. There will always be new financial instruments, the real question is whether these instruments will become popular enough to become a mainstream product. Many new securities just fizzle out because of lack of trading/investment interest. Getting a new product to be successful is quite difficult because market making firms don't want to make markets unless there are institutions/customers that want to invest, and institutions/customers don't want to invest without market makers. It's a chicken and egg issue.
The majors that are better at trading oil (ie European) are more ESG focused than the American ones. They are keeping their oil trading divisions but selling legacy assets (refineries, production). This lowers lowers structural pnl long term unless they become even more opportunistic about 3rd party deals and spec trading so it is changing and overall in a negative way, but their companies still need them to make money (trading is a big hitter at a divisional level even at the mammoths that are both BP and Shell) so the organizations themselves aren’t going away soon.
There are other commodities (carbon credits, biofuels) that ESG enables but my impression is that they are not a big pnl driver yet though I could be wrong about that.
Outside of what’s happening in a specific company, yes peak and then declining oil demand will shrink the size of the market eventually for physical trading. Gasoline will probably be in the crosshairs before anyone else, crude will be relatively more intact.
Yes, spec trading will be there but what is a problem there is if you enter into a low vol and low price environment. You can make money on the way down but an entire career is not made on just one move. No one can really tell how that side will develop decades into the future and right now, low vol is not an issue but it is possible.
Ah, a fresh face in the field! Welcome aboard, mate!
1) The shift towards green energy and ESG (Environmental, Social, and Governance) considerations is indeed a significant trend in the energy sector. However, it doesn't necessarily mean doom and gloom for major oil traders or prop shops. These companies are quite adaptable and many are already investing in renewable energy and exploring ways to make their operations more sustainable. They're like sailors adjusting their sails to the changing winds.
2) As for new financial instruments for green energy, it's a possibility. The financial sector is known for its creativity and ability to adapt to new market conditions. While it's true that green energy isn't a physical resource like oil, there are still ways to trade it. For example, renewable energy certificates and carbon credits are already being traded. So, who knows what the future might bring?
Remember, the finance world is as dynamic as the ocean waves. Always be ready to ride the wave of change!
Sources: Trading Power, Carbon & NGOs, https://www.wallstreetoasis.com/forum/investing/oil-and-gas-going-to-shiteffect-on-og-ib?customgpt=1, https://www.wallstreetoasis.com/forum/trading/effects-of-decarbonizationenvironmental-regulation-on-prospects-for-og-trading?customgpt=1
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