"The industry is finally starting to recover from the scandal that it will forever be associated with and is poised to grow substantially in the years to come," says Adam Josephson, an analyst in the securities and investments group at Celent and author of the report.
Two dominant players among banks, Morgan Stanley and Goldman Sachs, for example, participate in both the physical and financial energy markets and provide risk management products for clients and their own accounts. A number of other banks have also recently opened energy trading desks.
Hedge funds and other speculators, meanwhile, have been drawn into the financial markets by the recent rise in crude oil, gasoline and diesel prices, as well as the long-term trend toward higher and more volatile prices for crude oil and petroleum products, among other commodities.
Confidence in the market plummeted as major traders lost their investment grade ratings, the report noted, resulting in a decrease in volume in the natural gas markets and a collapse in volume in the electricity markets.
Industry participants are now paying far more attention to counterparty credit risk, using clearing mechanisms such as the Intercontinental Exchange and the New York Mercantile Exchanges ClearPort platform. Price transparency has improved and banks and hedge funds have become increasingly prominent, providing desperately needed liquidity.
About 17 percent of the energy trading market is traded electronically, with short-term natural gas contracts being the most heavily traded via this medium. Celent estimates that electronic trading will account for 29 percent of the market by 2008.
As the U.S. energy trading market matures, the report found, banks and hedge funds should help drive solid, steady growth as market participants become increasingly comfortable using risk management tools.