* Some producers have not hedged for years - Citi
* In Europe refining hedging remain depressed, except
* Citi says slightly scaled back own commodities trading
By Dmitry Zhdannikov
LONDON, July 2 Sharp volatility in U.S. gas and
power markets over the past winter due to extreme weather has
prompted some producers to return to price hedging after being
absent from the market for years, Citibank said on Wednesday.
Commodities producers and consumers tend to hedge forward
prices during periods of sharp volatility and reduce activity
when prices are stable, which means less revenue for banks who
are the main providers of hedging services alongside big oil
companies or power traders.
"You had producers who didn't really want to lock in a very
low forward curve," Citi's global head of commodities, Stuart
Staley, told reporters, referring to several years of depressed
U.S. natural gas prices due to the shale boom.
"But the volatility that was introduced to that market and
the higher prices that resulted from the extreme weather
conditions have brought back some of the gas and power client
activity that we haven't seen for some years. And that has been
a big contributor," he said.
Gas prices spiked in 2013/2014 because of an exceptionally
long and cold winter in most of the United States. A repeat of
that is likely, as scientists predict volatile long-term weather
patterns and as the share of gas in the U.S. energy sector
Staley said that Citi did two landmark deals over the past
year, becoming a physical offtaker of power to be produced by
two U.S. utilities - thus providing a hedge for several years of
forward production. He did not name the producers.
Citi has been expanding in commodities in the past years
after having cut exposure during the 2008 financial crisis.
The latest expansion went counter-cyclically to the moves by
Deutsche Bank, Barclays, Morgan Stanley
and JP Morgan which have all reduced or cut
exposure under regulatory pressure, leaving only Goldman Sachs
Staley said Citi faced the same pressures as other players
and has also reduced staff to 250-260 people in commodities
trading from the peak of 320 last year.
It saw revenues rising 220 percent last year from a "low
base" in 2012 and this year already looked better than last
thanks to a good performance of the power and gas divisions.
EUROPEAN OIL REFINING
In Europe, the bank is discussing capital solution deals for
oil refiners, when the lender holds oil and petroleum product
inventories on behalf of the plant.
Such deals allow refiners to alleviate the burden on working
capital and reduce price-volatility risks at a time of poor
Barclays was among the most active provider of such services
until it decided to scale back its commodities division earlier
"The landscape has changed a lot because it is driven by the
lack of volatility rather than anything else and a lack of
credit," said Staley.
Providing capital solutions to refiners is allowing banks in
Europe to maintain some meaningful hedging activity as demand
for other services from refiners has shrunk.
"There is no need to hedge oil in storage or to play some
contango plays. Forward margins are backwardated and spot
margins are extremely weak and as a refiner there is little need
to lock those in," said Staley.
Higher forward prices encourage refiners to store oil but as
the market has faced an opposite structure for some years, known
as backwardation, refiners have kept oil storage to a minimum.
(Editing by William Hardy)