851 Forward Markets

A forward market for energy develops because there is a time interval between the day a deal is made and the day it matures (i.e., a client buys now for delivery in the future). Oil in the spot market is priced on a transaction-by-transaction basis. For example, oil in the paper market is contracted for physical delivery at a specific date in the future; during this time interval, the contract can be bought and sold over and over again. In this way, forward markets are used to hedge forward physical supply. Forward markets in gas and electricity operate on the same conceptual basis. The success of a forward contract depends on its liquidity and the performance of the market players.

Liquidity is the ease with which the commodity can be bought and sold in the market. Performance refers to the ability of the market players to comply with the terms of the contract. The contract must be satisfied through physical delivery or cash settlement at the time of delivery. A wide range of players actively participate in the forward oil markets, including oil traders, major producers, refiners, investment banks, and major oil companies. These parties all provide liquidity to the market by guaranteeing performance.

In the electricity markets, forward and over-the-counter (OTC) swap markets exist, without a futures contract. Trading between forwards and futures in the same or similar commodities is often used to offset positions. However, there are major differences between the two markets. While both use standardized contracts which are traded regularly, futures contracts are traded on organized and regulated exchanges, while forward contracts trade on the offexchange, or unregulated, markets. Another important difference is that forward markets depend on market makers who, on an informal basis, are expected to perform, but future delivery is not guaranteed. The futures market guarantees performance through a clearinghouse and formal delivery procedure. Also, forward markets often deal in larger trading lots than futures markets. In fact, the ability of the forward markets to absorb larger lots without moving the market represents a significant liquidity advantage over the futures market.

Forward markets are generally used by a relatively small group of well-financed players, in contrast to the wider range of participants in futures. Forwards are similar to other off-exchange instruments in this way and have evolved into price benchmarks that are used in two- to six-month price swaps or OTC options transactions. In natural gas markets, some analysts feel that the major breakthrough that occurred with gas futures trading for the gas industry was the acceptance of the simple concept of selling natural gas forward. In electricity, it is not the concept of selling electricity forward, which has been going on for many years, but the concept that electricity is now a fungible commodity that is changing that industry's frame of reference.

Solar Stirling Engine Basics Explained

Solar Stirling Engine Basics Explained

The solar Stirling engine is progressively becoming a viable alternative to solar panels for its higher efficiency. Stirling engines might be the best way to harvest the power provided by the sun. This is an easy-to-understand explanation of how Stirling engines work, the different types, and why they are more efficient than steam engines.

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