CHAPTER 7 Speculation

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In this chapter we will discuss the role speculators play in the energy markets. To accomplish this task we will

  • Introduce additional derivatives and trading terminology and notation.
  • Present a comparison of speculation and hedging.
  • Discuss how traders may incorporate fundamental and technical analysis into their trading strategies to analyze energy markets.
  • Define and illustrate trading resources and tools, such as charts and quotes.
  • Present illustrations of speculative trading in the oil, natural gas, and electricity markets.

7.1 CONVERGENCE OF ENERGY AND FINANCIAL MARKETS

Various market forces have caused a shift in the balance of power between incumbent energy market participants and new energy trading market entrants (Figure 7.1).

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FIGURE 7.1 Convergence of Energy and Financial Markets

  • Price volatility fuels demand for new energy products and services.
  • Regulatory changes affect the playing field between banks and energy market participants.
  • Risk management tools provide additional insurance to energy market participants.

As a result of these market forces, we are seeing a convergence of financial and energy markets (Carpenter 2007).

Trading is a voluntary exchange of goods and/or services. These exchanges can take place between two parties ...

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