Commodity broker of the year: Tullett Prebon

Energy Risk Awards 2024: Brokerage anticipates client needs amid significant commodity market shifts

Kevin McDermott, senior managing director, Tullett Prebon

Over the past 12–18 months, energy markets have been rocked by some major events, including Russia’s invasion of Ukraine, severe weather events and the exigencies of the energy transition. Energy firms have had to change their behaviour and, in many cases, look for new tools and products to manage these new risks.

Energy Risk’s 2024 Commodity broker of the year, Tullett Prebon, worked closely with its clients throughout this time, responding quickly to their changing needs, pioneering new products and re-arranging its own teams to provide the best possible services, says Kevin McDermott, senior managing director of Tullett Prebon.

For example, in the aftermath of Russia’s February 2022 invasion of Ukraine, the subsequent upheaval to natural gas supply routes put increased emphasis on the Middle East and the US for supply. In response to this, Tullett Prebon moved some brokers to a Dubai office and strengthened ties between its London and US offices.

“We organised our US and European teams to work more closely, sending some people from our London office to New York so we could provide our clients with full coverage over a 24-hour period,” says McDermott. “We have brokers in Singapore and Madrid as well. We’re expanding our footprint to offer expertise to our clients in those parts of the market that have typically been very regional in nature.”

The brokerage also relied more heavily on its voice-broking services during this period.

“We noticed very clearly the value to clients of human-enabled, rather than purely electronic liquidity provision,” McDermott says. “Our brokers provide services that have a real impact on getting orders done effectively, for example, getting required volumes filled or providing creative access to illiquid markets through spreads.”

Energy prices have started returning to more normal, pre-Covid levels more recently, but volumes have not yet returned, according to Richard Hilton, head of UK power at Tullett Prebon. “I think we’ll see a little bit more time with volatility remaining where it is now before we return to normal volumes,” he says, adding that he expects this to happen over the course of 2024. “There are still quite a few trading companies that have been monitoring the markets over the past 12 months rather than trading.”

In the meantime, Tullett Prebon has been trading new products, including battery metals, weather derivatives and US Inflation Reduction Act Transferrable Tax Credits. The latter involves connecting clients that want to buy and sell these US tax credits, reducing the bid-offer spread in this nascent, illiquid market.

“We’re always looking to pioneer new products in niche areas that can help us serve our client base. But there’s also a real need for products in areas like battery metals,” McDermott says. “Lithium is becoming more important and more actively traded as car companies ramp up electric vehicle production, for example. So, we’re reacting to customer needs.”

Similarly, with the fuel mix in Europe skewing more towards renewable energy recently, the brokerage has stepped up its weather business in response to client needs. Weather derivatives trading has rocketed in recent years as businesses seek to protect themselves from adverse conditions. Average open interest in weather contracts on CME in January to September 2022 was four times more than during the same period the previous year, and 12 times average open interest in 2019.

“Weather has always been a significant driver of the energy mix, given that temperature is a big driver of energy demand. But now it’s more about wind speeds and predicting where the wind is going to blow next week, the week after and so on,” Hilton explains. “The higher the renewable percentage of the fuel mix in this country and across Europe, the more our clients will need weather derivatives to manage that risk.”

The brokerage is also working on an upgrade of its credit risk management service to include a proprietary algorithm that will help to significantly reduce clients’ credit needs, according to McDermott. This system enhancement is being implemented across the group of TP ICAP brokerages and is still being tested, but is expected to launch imminently. “By enhancing risk management practices, especially from service providers such as TP ICAP, firms can better navigate market fluctuations and mitigate potential losses,” McDermott says. “This contributes to a more resilient and efficient commodity market ecosystem, benefiting both individual firms and the broader market as a whole.”