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A New Era for Energy Market Speculation - Barış Sanlı

Gamespot's share value has stirred up a controversy in the financial markets and politics of regulation. Now we have seen that retail investors can beat the hedge funds. Short positions can be a matter of greater risk for institutional investors. The consequences will be felt in the energy markets and policies as well. The rise of the rest in the financial markets may create more chaos than stability for the already unstable energy markets.

We saw negative prices in the WTI markets last year. Also, record LNG prices and charter rates. If we look back further, we may also remember the speculation that led to the record rise in oil prices in 2008. The congress testimonies, academic writings didn't project a crystal clear picture. But we know for sure that there is an interaction between financial instruments and physical products, and that is all.

In each of these cases, there were fundamentals and interpretations of these fundamentals. The institutional investors bet on the rise of commodity prices due to the rise of China and Asia. Everyone has thought that there was a never-ending appetite for fossil and mineral resources. Now the times are changed, but the early signs of 2021 point to another commodities bull market. This time, the game is not confined to institutional investors, but retail investors may change or amplify the effect.

The closest example is the "Crude oil treasure" of the Bank of China. Just as everyone thought that oil reached its lowest price, individual investors started buying oil contracts through "Crude oil treasure." They couldn't get out of the physically settled contract before liquidity dried up. The losses were massive. The CFTC didn't publish a satisfying report. We still do not know whether London trading circles have a part in this trouble. Still, "the treasure" became a nightmare for small investors in China.

Gamestop or a company share is one thing, but the commodity world is another thing. The retail investors powered by Robinhood or other new trading platforms, with knowledge of sophisticated financial instruments, are already moving into silver and energy companies. They will not stop there and move into other energy arenas. Lots of individual investors can already buy crude contracts. But options were not that popular. This is a different game.

The negative prices in WTI was a complicated matter to understand. But some investors' have used a technical issue called Trading at Settlement (TaS) to their advantage. A much more technical tool called "options" is a different beast. Although the Mexican Government's Hacienda hedge involves options, Mexicans are the only ones to have a consistent process and gain success. More retail investors in the options world will shake energy markets.

Now the bigger question is how the energy market speculation with retail investors will look like? The simplest answer will be more volatility. The negative prices were the product of financial mechanisms. The retail investors will increase the extreme price levels we have seen. They may target fossil fuel companies for activist purposes; who knows? But unlike Gamestop, the rise in silver prices will affect the clean energy market. So these new trader groups may affect oil companies as well as clean energy transitions. The risks are higher now.

But the biggest worry is not financial markets. This is a continuation of the anti-elitist movement to the financial world. Soon it will infect the internet, energy, and climate change, too. The clash is no more between left and right. There are no holy grails to fight for, but the joy of shaking established elites or institutions. This will shape our energy policies, too. Especially climate change...


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