Education

Energy traders words

 By Nicholas Newman

Do you know that those involved in the trade in energy have their own specialised language? In order to avoid misunderstandings, they have developed their own vocabulary, abbreviations, definitions and standard phrases…

Brokers, independent energy trading companies and the trading arms of energy companies including RWE, EDF and BP, Eni, which act as intermediaries between producers and consumers, buy and sell billions of dollars worth of energy products such as oil, gas and electricity. Fast trading by telephone and internet require brokers to be precise and accurate in their dealings and, in order to avoid misunderstandings, they have developed their own specialized vocabulary, abbreviations, definitions and standard phrases.

Operating in an active market with a high volume of trading taking place or in a bear market such as oil, in which prices fell dramatically, the terms AA,” “cramming or “crack spread” have resounded. To avoid confusion, AA in this case does not refer to Alcoholic Anonymous nor for Britain’s Automobile Association but rather refers to shipping, Always Afloat”, which is a legal clause designed to prevent vessels, when they arrive at a berth, from touching the ground during loading or unloading.

How does energy trading work...

As for the termcramming”, it is not a case of a student furiously studying for an exam, but rather it is the practice of charging a customer for services without his knowledge or consent. As for “crack spread”, rather than a reference to a drug on the street, this is a calculation of the worth of a barrel of crude oil in terms of the value of its refined products such as gasoline and heating oil. And “contango” is not a Latin American dance but rather a description of an energy market where the anticipated value of the spot price in the future is higher than the current spot price. When a market is in “contango,” market participants expect that the spot price will go up. Where the price declines, this is referred to as “backwardation.”

Electricity trading has also generated its own specialized terms, not least of which are: a tight market,” “load shedding” and spark spread.” For electricity traders a “tight market” denotes that there is very little spare generating capacity surplus to cope with an increase in demand. The term load sheddingis most familiar to brokers in South Africa, where power cuts have been endemic since demand frequently exceeds the electricity supply. As for spark spread this refers to the difference between the price of electricity sold by a generator and the price of the fuel used to generate it; this term has become commonplace in Europe, and especially in Germany.

Then there are more general situations and conditions which merit their own vocabulary such as Act of God and Joker brokers.” Act of God, as in insurance, refers to an unforeseeable act of nature like an earthquake, tidal wave, hurricane or a wildfire such as the last blaze in Alberta — Canada’s oil sands production area — which in the case of energy trading means that the broker is unable to complete the trade. A case in point is the unforeseen 2011 earthquake and tsunami in Japan, which made it impossible for many Japanese energy companies to fulfill their contracts.

On a less serious note, “Joker brokers” is a nickname given to traders who are perceived as unreliable, or whose quantities and prices are seriously out of line with the market – especially with the internet and electronic displays disseminating market information. The international insurance market has also given us other words and phrases in common use in today’s energy trading, such as “Force Majeure.” In 2015 alone, “Force Majeure” was declared by Libya’s national oil company, by ENI and Shell in Nigeria and by Shell for disruption to its Singapore-based Ethylene complex. In each case supplies were severely disrupted and brokers commonly cited or explained the change in price to “Force Majeure.”

The term “benchmark” is crucial in energy trading since the benchmark price can indicate the profitability of a contract, indicate a trend, or highlight opportunities (differences in price) between supplies and qualities since, usually when either the price of WTI or Brent moves up or down, so does the price of other types of crude oil elsewhere in the region.

Monthly average Brent spot prices since May 1987

Roughly two thirds of all crude contracts around the world reference Brent Blend — the oil from four different fields in the North Sea which is light and sweet and being sea-borne is easy to transport. WTI (meaning West Texas Intermediate) is the main benchmark for oil prices in the US. This landlocked supply is relatively expensive to ship. Nevertheless, since the resumption of US oil exports, these two benchmarks now trade at more or less the same price. Similarly, Dubai/Oman is the main reference price for Persian Gulf oil delivered to Asian markets and is of a slightly lower grade than WTI or Brent.

Finally, there are words and phrases which reflect the acquired wisdom of a strenuous and precarious market. For example, I am a student of the market and my job is to learn,” which basically means that the trader never stops learning. But the incentives behind the profession’s jargon or specialist vocabulary are essentially utilitarian and have developed to ensure that the details of a contract and its conditions are accurately described and understood, thus hopefully preventing misunderstandings which can cost dear.

about the author
Nicholas Newman
Freelance energy journalist and copywriter who regularly writes for AFRELEC, Economist, Energy World, EER, Petroleum Review, PGJ, E&P, Oil Review Africa, Oil Review Middle East. Shale Gas Guide. https://nicholasnewman.contently.com/