CHAPTER 7 Speculation
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).
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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