[Photo:  Digital Currency Executive]

British bank Barclays has joined the list of top banks to exit energy trading, an exodus that analysts say raises concern among oil producers that falling liquidity means they cannot use derivatives for their basic function: to hedge risk by locking in future prices.

Wall Street firms have scaled back in commodity markets since the 2008 financial crisis from owning physical assets or taking positions in the market in the face of regulatory scrutiny. The banks were big players in the market for derivatives years into the future.

The departure of Barclays exacerbates the scarcity of counterparties for trade when producers are trying to hedge their production for 2018 and beyond, potentially raising the cost to lock in that output. That increase could force cash-strapped producers to forgo protection altogether, putting them at risk if the market takes another leg down. Some producers seek to lock in future profits and fund expansion through selling as much as 80% of production years into the future.

"It's one less bank willing to make a trade in the market, which reduces liquidity overall. That's one less source of credit and one less counterparty," said John Saucer, vice president of research and analysis at Mobius Risk Group.

Executives and traders within the industry said that Barclays' move was not surprising as it had been scaling down in recent years. But it represents the departure of another former top-five player from the energy space. Other big players who have already exited the market include RBS Sempra in 2010 and Deutsche Bank 3 years ago.

Merchant traders such as Vitol Group, Mercuria Energy Group and Glencore sought to fill the vacuum left by the investment banks. But the merchant traders have preferred to trade around their own physical positions, which are often linked to derivatives contracts with nearby expirations.

"Merchant books are physically oriented. They don't offer the same type of liquidity that the banks do," Saucer added. "When they're there, it's patchy and specific. It's ancillary to the other stuff they're doing."  That means merchant traders have little incentive to trade years into the future, and so have failed to plug the gap left by the big banks. Merchants also have tighter credit availability than banks, so are less willing to tie up capital in long-distant futures trade.