Detailed Glossary of Energy Trading terms

A spread is a difference in price, or value, of two similar but different underliers

An Energy Spread trade s a type of trade between two floating prices on similar but not identical energy underliers

Detail

Spread trades are usually financially settled

Different types of Energy Spread are classified by the difference in the underliers:

• Time Spread - The commodity and delivery location are the same, the delivery period is different. Also known as a Calendar Spread
• Location spread - The commodity and delivery period are the same, the delivery location is different
• Commodity spread - The delivery location and periods are the same, the commodity is different

Many commodity spreads are associated with the cost of generating electricity, so they involve electricity as one commodity, the others may be:

• Gas - usually called a Spark Spread
• Coal - usually called a Dark Spread
• Oil - usually called a Slick Spread 

Another group of commodity spreads are associated with the cost of refining, so they involve crude oil as one commodity, the others being refined products such as gasoline. These are known as crack spreads

Spread is also used to describe the difference in prices between locations, times, commodities

A type of commodity, which although it may be applied to any physical commodity, usually describes the ability to store natural gas in its gaseous state

Storage facilities usually consist of natural structures (depleted gas fields for example) that are attached to the gas pipeline network

Details

Storage may be bought from the Storage operators in auctions or traded

Storage allows the option to inject gas into storage, or release gas from storage

The commercial use of storage is generally to allow gas to be transferred into Storage (injected) in Summer months when the prices are low, and released (withdrawn) in the peak Winter months when gas prices are high

Storage behaves somewhat like an option on a physically settled time spread

Also known as a swing option, a swing contract is a type of contract that allows the buyer the option, but not the obligation, to take periodic deliveries of a product at a volume nominated by them between a minimum and a maximum volume at an agreed price

Detail

Swing contracts ate typically used in long term supply contracts of gas, oil and power

They are frequently combined with a take or pay clause, which specifies that a minimum amount of product must be taken over a set of long periods

e.g. A swing contract may specify that a daily volume between 10 and 100 units may be taken each day

A take or pay clause may specify that a minimum of 365 * 15 units may be taken over the entire year

Daily nominations of swing contracts are usually made by a particular time on the previous day, and may be transmitted electronically

Valuation of swing contracts is extremely complex, because of the daily optionality, and particularly if there is a take or pay clause as the overall delivery is constrained

Swing contracts may be short or long term (up to twenty-five years). Typically the price is either renegotiated periodically, or indexed to an index, or a basket of indexes 

A type of supply contract in which the buyer commits to buying a minimum quantity of some product, or to make an alternative payment for the amount below the minimum quantity

Take or Pay contracts are widely used in the Gas and Oil markets

Detail

The minimum quantity, the price of purchase, and the price paid for any amount below the minimum are all defined in the contract

Typically the buyer nominates a delivery volume each day from the supplier, the minimum quantity applies over a year

Usually used in the context of Natural Gas - an entry or exit point into a regional gas network or National Transmission System

Detail

In the UK natural gas is mostly extracted from gas fields in the North and Irish Seas and pumped through an offshore network of pipelines to a series of Terminals

At the Terminals the gas is metered and then enters the National Transmission System

LNG may be discharged from LNG vessels in an LNG plant, and then regasified into a Terminal located in or close to the port

Interconnectors connect to Terminals at both ends, allowing gas to be flowed out of, and into, the NTS

The UK Terminals are mostly located on or near to the coastline, and are therefore sometimes collectively referred to as the "Beach", or individually as Beach Terminals

The value of options varies with time, in general the uncertainty in the price of the underlier reduces as the moment of exercise approaches. Theta is the measure of how much the value of a trade, or set of trades, varies with time

Detail

Theta is one of the Greeks that measure sensitivity of the value of a trade or portfolio to the passage of time

Like most Greeks, except Delta, it is zero for linear trades (trades with no optionality)

A general term used to describe an agreement in which one party (the toller) provides an input product to the other party, and the other party provides another product (usually derived from the input product) in return

Detail

In the energy sector tolling agreements may cover:

• refining - crude oil for a refined product
• gasification - natural gas for LNG
• power generation - source fuel, usually natural gas, (and maybe carbon certificates) for power

In effect a tolling agreement is a physically implemented spread

A trade is a legally binding contract between two parties

A physically settled trade requires one party to deliver one or more commodities to the other party at a time and location specified in the trade terms, in return for one or more cash payments

A financially settled trade requires both parties to agree the value of one or more underliers, and make one or more cash payments dependent on those values

In general, trades have the following dimensional attributes

Commodity

Delivery location

Delivery period

Counterparty

Broker

Trades also have the following non-dimensional attributes

Price

Volume

See also Execution

A type of Futures contract that is physically delivered and settled at the exchange closing price of the contract

Detail

Traders make bids on an Exchange for a TAS contract, specifying volume and price offset, the Exchange matches bids and offers in the usual way

For example a trader may bid to buy 1,000 barrels of crude oil at the settlement price minus 3 cents, if another trader offers to sell that volume at that price then the exchange matches the orders and a TAS futures contract is executed at the settlement price less 3 cents

A TAS futures contract is similar to an indexed forward

TAS contracts are frequently used in oil futures

See also Trading at Market  

Something physical or tangible that may be referenced by a contract or trade

Detail

Financial derivatives are completely cash-based and usually have no physical underliers

Energy derivatives usually have at least one physical underlier, which may be a commodity,

e.g. coal

or a something related to a commodity

e.g. storage

The underlier acts as a bridge to the physical world - and usually as a set of reference prices for price-setting and valuation

We need to emphasize that nearly all energy trades have at least one physical underlier - few of them actually involve the delivery of energy commodities