A coalition of companies, including many in the energy sector, in a letter last week called on Federal Reserve Chairman Ben Bernanke to continue allowing banks to trade physical commodities in order to enable U.S. companies to manage risk.
"The intent of this letter is to ensure that the Fed understands and takes into consideration the significance [that] Main Street companies place on the important role banks play in providing commodity hedges to manage risk.
"We each face significant exposure to commodities, and we are not alone. It is estimated that approximately 45% of the companies in the S&P 500 are vulnerable to movements in the price and availability of commodities," the coalition of energy companies and associations wrote.
America's Natural Gas Alliance, Anadarko Petroleum Corp., Apache Corp., Devon Energy Corp. Dynegy Inc., Newfield Exploration Co. and Noble Energy Inc. were among the group of 30 companies and associations that signed the letter, which was organized by the U.S. Chamber of Commerce.
"We depend on having reliable, creditworthy, well-regulated counterparties, such as banks, in the commodities markets. Their willingness to assume appropriate market and credit risk as market-makers, including being able to trade physical commodities, allows us to manage our risks. If counterparties, such as banks, for financial hedging instruments for our physical commodities begin to disappear, our ability to manage our risk would be seriously impeded.
"We likely would be forced to tie-up our own capital in holding physical inventories and the related infrastructure to manage those inventories, and may find our options for hedging shrink, become less useful, or more expensive," the companies said. "As you examine the commodities markets, we ask that you consider the effects that limiting financial institutions' participation in providing hedging instruments would have on our businesses and the broader economy."
The crackdown by the Federal Energy Regulatory Commission on bank traders, the imposition of new rules under the Dodd Frank financial reform legislation, recent threats by the Fed and Congress, all are adding costs and pressure on commodities market traders.
The Fed recently put bank marketers on notice, questioning whether they should even be allowed to trade in physical commodity markets, and Congress followed up with a hearing to air its own doubts. The Fed said it is reviewing a landmark 2003 decision that allowed Citigroup's Phibro unit to trade oil, a move that at the time set a precedent that other banks followed (see NGI, July 29a).
Announcing its move to get out of the business in late July, JPMorgan Chase said it would "explore a full range of options over time including, but not limited to a sale, spin-off or strategic partnership of its physical commodities business" (see NGI, July 29b).
The ranks of energy marketers have been thinning lately as non-bank trading companies also have dropped out due to low prices, reduced basis and volatility and skinny margins on natural gas. Oneok Inc. earlier this year disbanded its natural gas market services unit that it had started up in 1995, and Hess Corp. also sold off its energy marketing unit recently for $1.03 billion (see NGI, June 17).
The JP Morgan's gas commodities business in 2012 ranked eighth in a chart derived from FERC 552 data of top marketers by volume of natural gas bought and sold. Goldman Sachs was No. 37, Deutsche Bank was No. 41 and Bank of America was No. 48. Separately, JP Morgan ranked ninth in NGI's Top North American Gas Marketers Rankings, moving 5.22 Bcf/d during 2Q2013.