As producers continue to increase their market share and profitability and buyers struggle to take control of the cost/risk mix, rising commodity prices are pushing even more growth in energy trading, according to a study by Energy Insights in Massachusetts. The market may grow as much as 30% by 2006, reports Jill Feblowitz, program director for the company's wholesale strategies research program-and technology is the key. Thanks to the current market, liquid hydrocarbon trading will continue to increase and gas is likely to fully bounce back from the post-Enron slump, Feblowitz says. The energy majors and financial-service firms are forecast to dominate the trading markets while asset-based traders are also expected to increase activity levels. Further out, more participation from financial institutions in energy-commodity trading will bring program trading into play by 2010. "According to the Futures Industry Association, the number of energy futures contracts traded for the year ending Dec. 31, 2004, was 243.5 million, up from 68.7 million contracts traded for the year ending Dec. 31, 1995, a growth rate of 15% per annum." High prices alone don't directly make a market, however-there's also liquidity and price volatility to consider. "What is bringing liquidity back to the market is the entrance of new players," Feblowitz says. "The biggest impact is from increased participation by financial-services firms, not only into the commodity markets, where they have been playing for some time, but also into the physical markets. Financial firms, having greater access to capital and the resources for new investments, were in a position to enter the post-Enron market." Combining a volatile market with increased investor scrutiny has resulted in more energy companies paying close attention to regulatory compliance issues. While Sarbanes-Oxley has grabbed and held many energy CFOs' attention for months, it may slowly be returning to company value and revenue, thanks to technology. "Elevated prices and increased instability in energy commodities are driving increased activity in energy trading and risk management," Feblowitz says. "For the last two years, IT investments have shifted from the front office to the middle and back offices, mostly in response to regulatory pressure. Although this focus is likely to continue throughout 2005, additional trends within the industry indicate a swing of the pendulum away from risk avoidance and toward revenue opportunities." She anticipates that more energy-focused financial institutions will be stepping up their current technological capabilities in order to hang on to a competitive edge. They will either make direct investments or get the technology they need through acquisitions of asset-based companies. Lingering shadows from the fall of Enron and a lack of reporting transparency set off a chain reaction of activities that have put increased restraints on energy companies; investigations led to some company credit downgrades which prompted a serious balancing of the books across the sector. The past several years have even seen increased divestiture activity in order to correct the debt ratio, Feblowitz says. As the energy industry has worked to redeem itself, more companies have looked to improved technology and energy trading as an option for growth. "Markets for energy are physical or financial. The more aggressive players-financial institutions, energy brokers, merchant generators, oil and gas integrated majors, national oil companies, and some investor-owned utilities-put an emphasis on speculation and revenue opportunities, while more conservative players-regional financial institutions, regional oil and gas companies, many local investor-owned utilities, and some municipals-are primarily engaged to hedge risk." Whatever a company's motives in today's market, technology is becoming more instrumental for energy players across the value chain and the financial institutions they work with. "...To take advantage of the growth in the energy market, [users] should make an effort to understand how best-in-class companies, which may be their competitors, are utilizing technology to their advantage. Technology users will want to assess how wide the gap is between themselves and their competitors as well as what it takes to close the gap."

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