Dark Energy Consulting
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Detailed Glossary
Detailed Glossary
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Position Reporting | ||
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Traders make, and lose, money by taking positions, either short or long at various points in the future Open positions in the future imply a risk that needs to be managed very carefully as changes in the forward curves affect the value of the net open position It is therefore critical that traders know their up to date position at all times This is the purpose of Position Reporting by means of Position Reports Detail | ||
Scheduling | ||
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Often used as a term for the Operational activities involved in gas and power Detail Short term position needs to be nominated or notified to the respective system and market operators:
This set of activities is often collectively referred to as Scheduling The schedule of a trade describes the delivery profile (that will need to be nominated) | ||
Speculative Trading | ||
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Speculative trading, also known as proprietary or spec. trading, is the trading of commodities with the intent of making a profit with no intent to make or take delivery of those commodities Detail Spec. traders take forward positions, either short or long with the view to closing out those positions at a later date, prior to delivery Closing out the open position involves trading to flatten the net position, eventually (but before delivery) to zero | ||
Spot | ||
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A spot trade in general refers to a trade with immediate delivery. In energy trading terms it usually refers to a trade with delivery on the day it is executed (within day) or for the following day (day ahead) Detail There is usually high volume trading in spots, particularly for power and gas, as speculative traders try and close out their positions as delivery times approach, and asset-backed traders try to balance, and financially optimize their positions. A large proportion of spots are traded on Exchanges and through Brokers Spot trades are settled physically, and even if executed on an Exchange are often settled by invoice and payment within a day or two of delivery | ||
Swing Contract | ||
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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 | ||
Volume | ||
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Volume is the measure of how much of something is involved in a trade Volume = Quantity (but the term Volume is nearly always used in preference) Hence in energy trading volume may have dimensions of energy, mass, weight or volume Detail Volume is one of the important attributes of a trade Volume may be specified: As a total for the entire trade By day, month or some other period for the duration of the trade Volume has units of quantity according to the commodity: Mass (often incorrectly called weight) - often used for coal, oil and other non-gaseous commodities e.g. metric tonne (T), kilogrammes (kg) Volume - sometimes used for gaseous and liquid commodities millions cubic feet (mcf), barrels (bbl), gallons Energy - may be used for any commodity e.g. therms, Megawatt hours (MWh) For gas and electricity trades it is generally more convenient to trade in quantities of energy Other energy commodities are usually measured in volumes of mass or volume since this is more practical to measure at delivery Volume traded will directly affect the traded position of that commodity Volume may be constant over the duration of the trade, or may vary over the different delivery periods: the delivery volumes are defined in the Schedule of the trade
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Arbitrage | ||
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The difference in cost of achieving the same outcome through different means Detail This is easiest explained as an example: To buy a particular new car in the UK costs £27,000 The identical UK-spec car costs £22,000 in Belgium It will cost you about £1,000 to have it shipped to the UK, plus another £1,000 costs for delivery, any inspections, your time to manage all this etc. Cost of buying the car in the UK = £27,000 Total cost of buying the car in Belgium and having it delivered to your home = £24,000 There is an arbitrage opportunity of £3,000 In general, in a liquid market, with minimal market constraints, traders will exploit any arbitrage, and the arbitrage values should all tend to zero In our example if everyone chose to buy the car in Belgium: the price would probably go up in Belgium because of the higher demand the cost of shipping might go up (because of demand and the realization it's valuable) the price of the car in the UK would probably fall (because they weren't selling any) When the market acts to reduce arbitrage to insignificant values then we describe this as arbitrage-free Arbitrage-free is a powerful method in many valuation tools: it implies we can value an Instrument or trade by looking at alternative ways of achieving the same outcome For example the value of an oil forward contract in six months time, should not be significantly different to the spot price of oil, plus all of the costs of storing that oil for six months | ||
LNG | ||
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Liquefied Natural Gas Natural Gas is difficult to liquefy by compression alone, it is usually liquefied, stored and transported at very low temperature LNG acts like oil and coal for transportation, like natural gas once it is returned to its gaseous form Detail Unlike propane gas it is not practical to liquefy natural gas (which is mostly methane gas) by compression alone, and it is normally liquefied by refrigeration to -160 oC and stored and transported at moderate pressures LNG needs to be transported in specialist ships (LNG vessels) that can maintain the low temperature required, so are quite different to other commodity carriers On arrival at a destination port the LNG needs to be returned to its gaseous state in a plant which is attached to a gas terminal Other than the ships themselves the logistics of LNG transport involve the same complexities as oil and coal LNG is big business for two main reasons: A vast quantity of natural gas is already available from oil rich countries - but there are no pipelines to flow it long distances (Russian gas into Europe being the main exception) The process of extracting natural gas from unconventional sources (typically shale) by hydraulic fracturing ("fracking") is likely to yield even more gas - but usually not where it's needed
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Margining | ||
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Margining is a form of Settlement, whereby exposure to Credit Risk between two parties is limited by keeping the overall Credit Exposure below a certain threshold by means of Margin payments between the parties whenever the threshold is breached Detail Let's take a simple example
If you go out of business or default on the deal I won't lose out
But if I default then you will lose $200
I need to arrange for that $200 available to you in case I do default
On day three we both note that the price has risen to $62 per tonne - that's good for me, bad for you Now if I default you won't need to deliver $12,400 worth of coal in exchange for $12,000 cash
But if you default then I'll be $400 worse off
You need to arrange for $400 to be available to me in case of default
Let's say on day eight the price rises to $66 per tonne
You now need to arrange for $1,200 to be available to me in case of default
We talked about making the cash available in case of default - how does that work?
There are actually a few different schemes:
Clearingin a clearing arrangement each if us has a margining account with a central clearing house
Before we even start trading we need to deposit some money into the account, and each time we execute a trade we need to make sure there is sufficient in the account to cover a certain amount of loss
Let's say we both deposit $1,500 initially and then an additional $1,000 as a result of doing the single trade - we can see that on typical price movement, for the volume of the trade this, then it would take quite a large movement in the price to change the value of the trade by $1,000
We both now have $2,500 deposited
The initial $1,000 deposit against this specific trade is called the Initial Margin
At the end of day two the clearing house would remove $200 from my account and put it into your account - this is the Daily Variation Margin
I now have $2,300 and you have $2,700
At the end of day three the clearing house would remove $600 from your account and put it into my account - this is the Variation Margin
I now have $2,900 and you have $2,100
At the end of day eight I would have $3,700 and you have $1,300
At this stage you would need to make a payment into your account to top it back up to a minimum level - this may be $200, or it might be more depending on the agreement
CollateralWe might agree to post $2,000 collateral with each other to cover any initial movement either way
We agree to margin limits of a minimum of $1,500 and a maximum of $2,500, if the margin falls below $1,500 we will post a minimum of $500 to get the collateral back up to $1,500, and likewise, if the collateral goes above $2,500 we will be able to withdraw cash to bring it below $2,500
At the end of day two my collateral stands at $1,800 - the cash in the collateral account minus the $200 current liability on the deal at that point - we're both OK, I have more than the minimum $1,500
At the end of day three I have $2,400 collateral and you have $1,600 (your original $2,000 less your current liability of $400 on the deal)
At the end of day eight I have $3,200 collateral, and you have just $800 (your original $2,000 less your current liability of $1,200 on the deal)
A requirement to top up a clearing account or collateral account is known as a margin call
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Terminal | ||
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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 | ||