Pointing to the increased participation of traditional financial institutions in the energy trading markets, the International Monetary Fund (IMF) said it plans to heighten its efforts to monitor energy trading and broader energy developments.

The “growth in the financial energy trading markets has been tremendous over recent years, with energy-related contracts now being the second most heavily traded category of futures contracts on organized exchanges,” the IMF said in its semiannual “Global Financial Stability Report,” which came out last week. It noted that the players in the energy markets have changed as well.

The “range of participants actively trading energy-related financial instruments has expanded over the last three or four years. In addition to the traditional actors, such as oil and gas producers, utilities, refiners and other industrial consumers, the market now…includes global investment banks as well as hedge funds,” the IMF said.

The expanding role of investment banks, hedge funds and other institutional investors in the energy markets “implies that they now have great exposure to energy risks, including the counterparty risk from transactions with traditional energy producers and consumers.” Two investment bankers that are particularly active in energy markets are Goldman Sachs and Morgan Stanley, the IMF noted.

“Over the last two to three years, just as energy trading firms dropped out of the energy trading markets, investment banks have expanded not only their dealer activities, but have also invested in physical energy assets…Investment banks have also expanded (or reconstituted) their activities in the energy trading business in response to increased demand from non-financial corporations and institutional investors, including hedge funds, both to hedge against the rise in energy prices and to speculate.”

This, the IMF believes, “may…imply an increased need for policymakers to understand the dynamics of these energy markets, as they may impact the performance and stability of these financial intermediaries, as well as in a broader economic sense.”

The IMF said it tends to “share the view of some analysts that many of these energy markets are undergoing significant changes, with the largest energy consuming and producing nations experiencing different, fundamental issues (including energy dependence, potential capacity constraints, national security and environmental), as well as increasing demand from fast-growing emerging markets such as China and Southeast Asia.”

For these reasons, “we will increase our efforts in monitoring energy trading and broader energy market developments,” the IMF said.

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.