Weather house of the year: Marex

Energy Risk Awards 2021: Brokerage provides unique, actionable weather intelligence to traders

Georgi Slavov, Marex

The spread of weather-dependent renewable energy, combined with an increase in severe weather events in recent years, has made weather analysis a central factor for studying energy markets. However, there is often a mismatch between traders and meteorologists when it comes to discussing this issue.

Over the last year, energy broker Marex has worked hard to address this, rolling out its proprietary weather risk analysis tools and its unique methodology to its wider commodities research function.

“The dramatic increase of renewable power generation created a direct link with meteorological information, particularly in Europe, where renewable power generation was given preferential access to the grid,” says Georgi Slavov, global head of fundamental research at Marex. “The increased volatility in the market, as a result, has made understanding weather an increasingly important factor in being able to manage energy-related risks.”

However, key information can get lost in translation in discussions between meteorologists and traders, he notes. 

Giacomo Masato, meteorologist and senior research analyst at Marex, agrees: “Meteorologists typically come from an academic or a physics background, and they don’t necessarily speak the language of risk – or even really understand what the trader wants.”

In order to optimise the use of the valuable weather-related insights generated by the research team at Marex, the firm has developed a methodology based on what it calls “weather regimes”.

“What we tried to do was create a kind of Google Translate,” adds Masato. “We translate the weather information into an analogy, into fundamental information.”

This approach involves quantifying weather-related information – temperatures in France or Germany, for example, or precipitation in the UK – and benchmarking it against known energy market outcomes based on historical weather data.

“We’ll look at the general weather pattern forecast for the next five to seven days, for instance, and compare it to specific weather regimes [based on past data] and how that impacted energy market fundamentals,” Masato explains.

“In other words, we have isolated some specific and very detailed grand-scale weather regimes over Europe, and worked out how they will impact the market in a specific way with regard to price, supply and demand.”

The team projects the forecast into those regimes, and Marex’s proprietary algorithms immediately show whether the forecast is predominantly bullish or bearish for energy markets.

Masato was particularly well-suited to developing this approach at Marex because his previous role in academia focused on research to identify patterns in weather variability.

“This involved developing diagnostics and metrics to translate weather information, to make it more comprehensible,” he says. “Practically speaking, that meant quite a lot of statistics work and probabilistic language, which, of course, has become instrumental once again now I work with energy traders. They use the probability approach because it highlights potential risks in their trading strategies.”

As progress towards a low- or even zero-carbon world continues apace, weather – and, by extension, weather-based models such as this – will only become more important to the energy trading and risk management space.

“Ten years ago, the [energy] market only cared about meteorology from a demand perspective – the impact of a colder winter on natural gas demand in Europe, for example, because production was largely coming from fossil fuels,” says Masato.

“But now, production is increasingly dependent on this weather component, as well, due to increased use of renewables. In other words, weather is now modulating not only demand via temperature, but it’s also modulating supply by affecting the renewables component, whether that’s hydro, solar or wind power. That is why this ‘weather regime’ approach is very wise.”

Both Masato and Slavov argue that their approach to weather risk analysis provides a unique solution for energy sector clients. The combination of their ‘weather regimes’ approach and the proprietary algorithms and seasonal weather models Marex has developed in-house for analysis provides a different viewpoint for clients. The alternative is typically to rely on weather forecasts and analysis already used extensively by competitors across the market.

Marex rounded out its offering in this area by making its weather risk analysis available via its web-based platform Neon, which was deployed in 2020. In addition to execution capabilities, the platform provides clients with access to Marex research, analysis and commentary on more than 20 commodity markets via Neon Insights.