The International Monetary Fund said on Wednesday it would increase its monitoring of energy trading and related market developments as more banks and hedge funds enter the energy markets.
In its biannual "Global Financial Stability Report," the global lender said a closer look is needed because of financial institutions' greater exposure to energy risks from volatile prices for crude oil and petroleum.
"This may also 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.
Many investment banks have expanded their energy trading in response to increased demand from nonfinancial corporations and institutional investors, including hedge funds, the IMF report said. Banks trade both to hedge against the rise in energy prices and to speculate.
Earlier this month, Merrill Lynch & Co Inc said it would buy the energy trading business of Entergy-Koch LP for an undisclosed amount. Other big financial institutions that have expanded their energy trading in recent years include Goldman Sachs Group Inc, Morgan Stanley, UBS AG and Deutsche Bank AG.
Hedge funds have been drawn into the energy trading market by the recent rise in petroleum prices as well as by the long-term trend toward higher and more volatile prices for crude oil.
The IMF said hedge funds were active in the oil markets during late 2003 and early 2004 due mostly to their belief that "demand increases were of a more fundamental or structural nature" and likely to persist. Pension funds and other sophisticated investors are also eyeing the oil market because of low returns in the equities and bond markets in recent months, the IMF said.
The IMF report said since the collapse of Enron and withdrawal of energy traders from the market, Internet electronic trading platforms had expanded.
Trading on these systems has grown since 2000, with between $2.5 billion and $4 billion per day in mainly energy trading on the Intercontinental Exchange, which posts US and European oil, gas and electricity contracts.
Investment banks have also been buying electric power plants and other assets, it said. The IMF report noted that Goldman Sachs "has been particularly active" in buying power plant assets and supply contracts in the past two years, spending some $2.5 billion in 2003.
A copy of the report was posted at www.imf.org.
The global financial system is at its most resilient since the equity bubble burst in 2001, the International Monetary Fund said on Wednesday, despite rising interest rates, heightened security and higher oil prices.
In an upbeat "Global Financial Stability Report" on the health of world's markets, the IMF said the global economic recovery, strong capital bases and improved risk management practices had helped financial institutions cope.
"Short of a major and devastating geopolitical incident or a terrorist attack undermining in a significant and lasting way consumer confidence and hence financial asset valuation, it is hard to see where systemic threats could come from in the short term," the IMF said.