Total derivative exposure in electricity market concerning
Discussion
Far bigger issues going on in derivative market for energy particularly electricity. Derivatives of course have a vital role in hedging but there are signs of low liquidity and high volatility. Spot prices all over Europe for electricity are insane there must be some massive margin calls. Provisions could be enormous for some
The numbers involved here potentially won’t just break companies but Governments will struggle to cover exposures
Central banks and regulators appear as usual to be asleep at the wheel. Some institutions must potentially be sitting on enormous profits and some enormous losses
You have to question are there bigger forces at play here. I don’t like conspiracy theories but something very abnormal seems to be happening. The public are just the poor people picking up the tab.
Governments G7/20 should really be acting to get these markets under control
Politicians are down in the weeds looking for solutions they just dont understand financial markets. Central Banks always slow to act and regulators don’t collaborate
It’s a mess but potentially this could be very nasty for those that hold the wrong end of these contracts.
The numbers involved here potentially won’t just break companies but Governments will struggle to cover exposures
Central banks and regulators appear as usual to be asleep at the wheel. Some institutions must potentially be sitting on enormous profits and some enormous losses
You have to question are there bigger forces at play here. I don’t like conspiracy theories but something very abnormal seems to be happening. The public are just the poor people picking up the tab.
Governments G7/20 should really be acting to get these markets under control
Politicians are down in the weeds looking for solutions they just dont understand financial markets. Central Banks always slow to act and regulators don’t collaborate
It’s a mess but potentially this could be very nasty for those that hold the wrong end of these contracts.
I have just had a look at Google to see if any articles have been written
This one published the other day may help
https://www.reuters.com/business/energy/fortum-say...
This one published the other day may help
https://www.reuters.com/business/energy/fortum-say...
So… if I understand correctly:
Energy prices are going up.
People are messing about making money from fluctuations in the market.
This in itself is driving prices up.
At some point the whole thing will collapse and someone is going to be left holding the baby.
I may well be completely wrong. If I’m not, this is the inevitable conclusion of the way energy is traded and governments won’t get involved until it’s too late.
Energy prices are going up.
People are messing about making money from fluctuations in the market.
This in itself is driving prices up.
At some point the whole thing will collapse and someone is going to be left holding the baby.
I may well be completely wrong. If I’m not, this is the inevitable conclusion of the way energy is traded and governments won’t get involved until it’s too late.
Hmm, some threads are by their nature niche, but this one is perhaps a bit too specialist (though the lack of acronyms is at least refreshing).
A hedge - outside of the homes & DIY forum at least- is I believe a bet taken against a significant price change?
And is done by either agreeing a set price "now" for a commodity in the "future" (and soaking up the hit if prices end up lower or higher)
Or buying futures in at least 2 commodities where price movements are expected to offset?
Obviously, the complexity of this across products, markets and currencies is orders of magnitudes higher.
So
The fact the "rich" get richer - this is not a conspiracy theory. Surely it's plain obvious, from any observation of history.
Whether the Ukraine war was manufactured for profit? I can't believe that - far easier to believe capitalism is just damn good at exploiting opportunities.
Capitalism - like sport- must have a winner and loser. We know that when choosing to play.
But I agree...when ever anyone loses, someone is winning.
Both as manufacturers and energy companies must be making abnormal levels of profit.
Regulators are behind the curve, simply because that's where business wants them.
Regulators are set by politicans. Politicians are funded by business. Business lobby politicans etc. It's a curclr. Again, this is hardly conspiracy theory stuff - it's just obvious surely.
Finally, I saw a video "short" this morning (guilty as charged) of kids rampaging on Oxford Street. We can dismiss them as ferral.
But a society where the gulf between poor and rich is so large...how far away are we from that? The police already ignore property crime under, what, £500? I can see an increase in shoplifting this winter, just for food and basics.
So whilst this thread is very high sounding and probably not very accessible for some, the downstream impact of it probably will be quite easy to see.
I will try and follow it as far as I can.
Ian
A hedge - outside of the homes & DIY forum at least- is I believe a bet taken against a significant price change?
And is done by either agreeing a set price "now" for a commodity in the "future" (and soaking up the hit if prices end up lower or higher)
Or buying futures in at least 2 commodities where price movements are expected to offset?
Obviously, the complexity of this across products, markets and currencies is orders of magnitudes higher.
So
The fact the "rich" get richer - this is not a conspiracy theory. Surely it's plain obvious, from any observation of history.
Whether the Ukraine war was manufactured for profit? I can't believe that - far easier to believe capitalism is just damn good at exploiting opportunities.
Capitalism - like sport- must have a winner and loser. We know that when choosing to play.
But I agree...when ever anyone loses, someone is winning.
Both as manufacturers and energy companies must be making abnormal levels of profit.
Regulators are behind the curve, simply because that's where business wants them.
Regulators are set by politicans. Politicians are funded by business. Business lobby politicans etc. It's a curclr. Again, this is hardly conspiracy theory stuff - it's just obvious surely.
Finally, I saw a video "short" this morning (guilty as charged) of kids rampaging on Oxford Street. We can dismiss them as ferral.
But a society where the gulf between poor and rich is so large...how far away are we from that? The police already ignore property crime under, what, £500? I can see an increase in shoplifting this winter, just for food and basics.
So whilst this thread is very high sounding and probably not very accessible for some, the downstream impact of it probably will be quite easy to see.
I will try and follow it as far as I can.
Ian
cc3 said:
Far bigger issues going on in derivative market for energy particularly electricity. Derivatives of course have a vital role in hedging but there are signs of low liquidity and high volatility. Spot prices all over Europe for electricity are insane there must be some massive margin calls. Provisions could be enormous for some
The numbers involved here potentially won’t just break companies but Governments will struggle to cover exposures
Central banks and regulators appear as usual to be asleep at the wheel. Some institutions must potentially be sitting on enormous profits and some enormous losses
You have to question are there bigger forces at play here. I don’t like conspiracy theories but something very abnormal seems to be happening. The public are just the poor people picking up the tab.
Governments G7/20 should really be acting to get these markets under control
Politicians are down in the weeds looking for solutions they just dont understand financial markets. Central Banks always slow to act and regulators don’t collaborate
It’s a mess but potentially this could be very nasty for those that hold the wrong end of these contracts.
Do you work in this area? If not, how are you getting your exposure to this information?The numbers involved here potentially won’t just break companies but Governments will struggle to cover exposures
Central banks and regulators appear as usual to be asleep at the wheel. Some institutions must potentially be sitting on enormous profits and some enormous losses
You have to question are there bigger forces at play here. I don’t like conspiracy theories but something very abnormal seems to be happening. The public are just the poor people picking up the tab.
Governments G7/20 should really be acting to get these markets under control
Politicians are down in the weeds looking for solutions they just dont understand financial markets. Central Banks always slow to act and regulators don’t collaborate
It’s a mess but potentially this could be very nasty for those that hold the wrong end of these contracts.
- How much of the price volatility is speculators entering the market to make money?
- How much is positions being hedged so they are not caught short/exposed this winter?
- How much is positions being covered because the price increases?
- Is the above contributing to a bubble in this market?
Whenever a market gets bubble-like or frothy, some big hitters need to take a bath to readjust the appreciation of risk in said market. That how markets work. When market commentary on said market reaches MSM reporting and the man on the street starts talking about it, that normally means the market is in or heading into bubble territory.
AI trading will have a hand in this as well there will have been a massive pile on to try and make money, these instruments are of no economic value to society when they are abused, it'll be just like last time.
Seems to me that they always look for a market that is too big to fail first housing, now energy, next water I guess it needs to stop.
Like going to a casino and betting far more than you have/or they have, the casino goes bust and everyone is fired yet you get your winnings and walk off...whilst everyone else picks up the tab.
cc3 said:
I have just had a look at Google to see if any articles have been written
This one published the other day may help
https://www.reuters.com/business/energy/fortum-say...
The article says nothing about speculation, it just says the price is going up. Futures are the simplest form of derivative, and there isn't anything clever you can do with them really, when people talk about problems with derivatives they normally mean things like options, swaps, etc. The reason he is saying the market is broken is simply the margin requirements are high and liquidity is low. It is especially pronounced in Nordic markets which have low liquidly anyway as they are such small markets.This one published the other day may help
https://www.reuters.com/business/energy/fortum-say...
If anything speculating is becoming extremely difficult due to the very high margin requirements, and lack of liquidity is due to a lack of people wanting to trade (or being able to trade). If your assertion was correct that there is lots of speculation then liquidity would be much better as there would be more people trading.
Edited by Condi on Sunday 28th August 10:58
Condi said:
The article says nothing about speculation, it just says the price is going up. Futures are the simplest form of derivative, and there isn't anything clever you can do with them really, when people talk about problems with derivatives they normally mean things like options, swaps, etc. The reason he is saying the market is broken is simply the margin requirements are high and liquidity is low. It is especially pronounced in Nordic markets which have low liquidly anyway as they are such small markets.
If anything speculating is becoming extremely difficult due to the very high margin requirements, and lack of liquidity is due to a lack of people wanting to trade (or being able to trade). If your assertion was correct that there is lots of speculation then liquidity would be much better as there would be more people trading.
Here’s a little more background same in both markets. If anything speculating is becoming extremely difficult due to the very high margin requirements, and lack of liquidity is due to a lack of people wanting to trade (or being able to trade). If your assertion was correct that there is lots of speculation then liquidity would be much better as there would be more people trading.
Edited by Condi on Sunday 28th August 10:58
https://www.europarl.europa.eu/doceo/document/P-9-...
Edited by cc3 on Sunday 28th August 11:29
Not a U.K. paper but you will note re speculators. Important that people don’t dismiss how speculators distort markets and how regulators and central banks are usually poor at limiting such activities. Usually a painful ending with Governments picking up the tab or in the case of energy the public
https://www.pc.gov.au/inquiries/completed/electric...
https://www.pc.gov.au/inquiries/completed/electric...
cc3 said:
Here’s a little more background same in both markets.
https://www.europarl.europa.eu/doceo/document/P-9-...
It's not any background at all, it's a parliamentary question about speculation. https://www.europarl.europa.eu/doceo/document/P-9-...
The only information in it is that the "churn rate" of TTF increased from 13.9 in 2011 to 114.5 in 2020, although if offers no explanation why. Given as 75% of Europe's gas is traded via TTF, and yet the "churn rate" measure only includes Dutch consumption then it's not surprising that the volume traded vs consumption is high.
cc3 said:
Not a U.K. paper but you will note re speculators. Important that people don’t dismiss how speculators distort markets and how regulators and central banks are usually poor at limiting such activities. Usually a painful ending with Governments picking up the tab or in the case of energy the public
https://www.pc.gov.au/inquiries/completed/electric...
The only comment about speculators in the whole paper are that they add liquidity, which is a benefit not a negative. https://www.pc.gov.au/inquiries/completed/electric...
"The hedging market also has a large number of speculators that are not directly involved in generating or retailing electricity. Speculators will enter the market if they think that the electricity derivatives are mispriced. While commercially motivated, speculation provides liquidity to the market and thereby provides market participants greater surety that they will be able to trade in the future."
Speculation tends to increase the volatility of the market, but it also does provide important liquidity and the underlying fundamentals of a market always win in the end. The market isn't high because of speculation, the market is high because it is fundamentally tight. Curbing speculation might bring down prices a little, but it would also make it much harder for people to trade and the reduced liquidity could end up pushing prices even higher than they are with speculators.
Edited by Condi on Sunday 28th August 11:46
cc3 said:
This is an opinion piece with no evidence to back up what they're saying. I don't need "background reading", I've been trading commodities for over 10 years and the 2 markets I've traded have been ags and energy.
This debate has been done to death, but there is no evidence I've seen which shows speculators push up prices on average. There maybe times they push up prices, but when they push down prices (oil went negative, remember?), then the same people go very quiet! You can't have it both ways. The overall consensus seems to be that the liquidity they provide is more beneficial then the volatility they can bring. On the other thread someone suggested that, even if we fracked on a large scale in the UK, the gas produced would still be worth the massive high current market price so, other than increasing global supply (and maybe reducing market prices bit as result), it wouldn't help.
So, if all gas is worth the market price regardless of where it is produced, why is gas in the USA massively cheaper?
So, if all gas is worth the market price regardless of where it is produced, why is gas in the USA massively cheaper?
OddCat said:
On the other thread someone suggested that, even if we fracked on a large scale in the UK, the gas produced would still be worth the massive high current market price so, other than increasing global supply (and maybe reducing market prices bit as result), it wouldn't help.
So, if all gas is worth the market price regardless of where it is produced, why is gas in the USA massively cheaper?
Why do (and a small number of others) keep asking the same question, despite getting the answer several times over, using out of date graphs to try and prove a point? So, if all gas is worth the market price regardless of where it is produced, why is gas in the USA massively cheaper?
Gas prices everywhere in the world are high. Europe has a particular logistical problem in that a large amount of it's infrastructure was designed to ship gas from East to West. It simply does not have the ability to import from elsewhere and to supply everyone with as much as they would normally use without Russian gas, so it is pricing to destroy demand. The market needs people to switch from gas to oil, to reduce their heating by 1 degrees etc.
As for why gas in the USA is cheaper, well, they produce a lot of gas which needs to be exported. Their domestic price is (approximately) whatever the price in Europe or Asia is, less the cost of getting it there on a boat. There are some additional complexities, for example their largest export terminal had a problem earlier in the year and their export capacity has been lower, which depresses domestic prices as there is less demand. However, to say it's "cheap" is simply not true. This is a graph of Henry Hub gas prices - the US benchmark. Gas prices there are still 4 times what they usually are, as a result of additional demand from Europe and Asia.
As for elsewhere in the world, Pakistan already have rolling blackouts because they simply can't afford to buy gas any more, and Japan (the world's biggest LNG buyer) are looking to restart some nuclear reactors more quickly than planned to reduce their gas needs.
The UK is connected to Europe via pipelines, and we are currently shipping as much gas as possible to mainland Europe. If we produced more of our own then all it would do is be priced just less than the cost of bringing in LNG from abroad (making only a very small difference to prices here), until you got to the point at which we had no imports from LNG, and still had an oversupplied market from domestic production. That isn't going to happen unless fracking is done on a huge scale, or we start making a big push to exploit the remaining known North Sea gas fields. Either is a multi-decade project, and not a short term fix.
US gas futures
UK gas futures - notice how the shape is very similar to US futures, but more extreme as we have a much closer relationship to EU prices than America do, basically our cost of "shipping" gas to Europe is tiny compared with the cost for American gas to get to Europe.
Your question is a bit like asking "Why is oil cheaper in Saudi Arabia"? It's quite simply that where oil (and gas) are produced and where they are consumed are different places, so you have to account for the cost of moving it from one place to another.
Edited by Condi on Sunday 28th August 12:43
OddCat said:
On the other thread someone suggested that, even if we fracked on a large scale in the UK, the gas produced would still be worth the massive high current market price so, other than increasing global supply (and maybe reducing market prices bit as result), it wouldn't help.
So, if all gas is worth the market price regardless of where it is produced, why is gas in the USA massively cheaper?
Look at the value of the euro and pound to the dollar. Markets think the EU and U.K. are basket cases. There’s 20% of your difference. US has access to cheap shale gas it was a game changer for them. Their industry now has access to cheap gas whereas industry in Europe will be crippled. The Green lobby funded by Putin shut down any chance of cheap energy in Europe. Instead we will be bankrupt So, if all gas is worth the market price regardless of where it is produced, why is gas in the USA massively cheaper?
Didn’t nickel on commodities exchange get halted due to speculation and abnormal valuations?
We’ve financialised everything and now we have derivatives on critical energy supplies being gamed to excess.
The danger seems to be when X loses and Y wins, and X has to sell their hedge assets down, often causing a fire sale effect, as other investors then have to sell that asset down as it’s losing value and no longer covering THEIR hedge.
The old systemic risk thing. It permeates into real assets. Pensions often being the ones they scare the general public with to then get away with bailouts for the ‘market’ participants in these questionable investments.
The only question is, is there the motivation (or even money) to support anything at a time of record fiscal tightening?
We’ve financialised everything and now we have derivatives on critical energy supplies being gamed to excess.
The danger seems to be when X loses and Y wins, and X has to sell their hedge assets down, often causing a fire sale effect, as other investors then have to sell that asset down as it’s losing value and no longer covering THEIR hedge.
The old systemic risk thing. It permeates into real assets. Pensions often being the ones they scare the general public with to then get away with bailouts for the ‘market’ participants in these questionable investments.
The only question is, is there the motivation (or even money) to support anything at a time of record fiscal tightening?
Mr Whippy said:
Didn’t nickel on commodities exchange get halted due to speculation and abnormal valuations?
We’ve financialised everything and now we have derivatives on critical energy supplies being gamed to excess.
Yes, LME shut down the market, in many people's opinion wrongly and illegally. It is not the market operators job to decide what is "abnormal", the trader's job is to trade and decide what prices are right or wrong. They are rightly being sued for it. We’ve financialised everything and now we have derivatives on critical energy supplies being gamed to excess.
As for "financialised everything NOW" - futures markets are the oldest financial markets in the world. It started with agricultural futures hundreds of years ago, for the very specific purpose of allowing farmers to sell when prices were high and mills to buy when prices were low. They serve an incredibly important function, both then and now.
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