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Big Three Energy Commodities
This page introduced to the ‘Big Three’ energy commodities.
1) What are the ‘Big Three’ Energy Commodities
1.1) Crude Oil/Refined products
1.2) Natural Gas
1.3) Power (a.k.a., Electricity).
1.4.1) We are considering ‘Crude Oil’ and ‘Refined Products’ as being one category here, instead of two, which is an acceptable alternative.
1.4.2) We’ll shorten ‘Crude Oil’ to just ‘Crude’ or ‘Oil’ in our blog.
1.4.3) Refined products includes, for example, Unleaded Gas, HSFO (High Sulfur Fuel Oil), Diesel, Naphtha and Kerosene.
These commodities are the biggest in terms of dollar equivalent amount. Both for energy and for the commodities markets in general.
As a comparison, think about how much money you spend on energy for your home, e.g., Natural Gas or Power for heat and/or cooking and/or powering lights and appliances. Compared that to the amount of money for a softs commodity like coffee. Unless you drink a lot of coffee :)
3.2) LNG (Liquefied Natural Gas)
3.3) We are considering LNG to be different here versus regular Natural Gas. Why? This is categorized from the viewpoint of CTRM system design. A system that is designed for regular Natural Gas, which is transported in pipelines, may not work with LNG, which is transported in ships.
These three commodities have different design modelling requirements for CTRM systems.
These are the criteria that make a differences:
Natural Gas can be stored. So a CTRM system that supports these commodities must allow for storage, e.g., real storage like storage tanks, or ‘virtual storage’ from pipelines called ‘Park and Loan’.
Crude/Refined Products. Same thing as Natural Gas.
Power cannot be stored, at least not in the traditional way. i.e., we aren’t counting batteries or forms of indirect storage.
Fungible means that the item is not unique, such that any similar item can be substituted for it. A common example of this would be cash, e.g., a $100 bill is the same as any other $100 bill. So if you put one $100 cash in the bank, and take out a different $100 bill (or 5 $20s), you are happy.
Natural Gas: Fungible. What you put into one end of a pipeline is not the same molecules as what you might take out at another location on a pipeline. In particular, all natural gas within a pipeline system is expected to be the same grade.
Power: Fungible. Same thing as Natural Gas.
Crude Oil/Refined Products. Generally not fungible. Meaning, if you put a particular grade of refined product, e.g., 87 Octane unleaded gas with a certain percent sulfur into a ‘cycle pipeline’, you expect you’ll get the same molecules out at the destination location.
There are some pipelines where Crude is fungible, i.e., where you put in a certain grade of crude into one location on a pipeline, and take out different molecules of crude at another location, i.e., same grade, but different ‘molecules’.
Natural Gas: All the same grade/quality
Power: All the same grade/quality
Crude Oil/Refined Products. Each batch of Crude Oil or refined products can have various attributes that impact the grade or quality. These can be measured. Some are quantitative like the amount of sulfur or the octane or the viscosity. Some are qualitative like the color. Each batch may need to be measured for these various attributes and the specifics can alter the price, to raise or lower the payment amount based on whatever counterparties agreed was appropriate.
4.4) Time Duration
Power is typically hourly. You’ll likely need to schedule (i.e., physical logistics) down to the hourly level. Meaning, for example, the volume for 3pm to 4pm may be different than the volume from 4pm to 5pm. And settlement prices may need to be at the hourly level, i.e., 24 different prices per day. Also may need to take into account long and short days (25 hour and 23 hour) for daylight savings. In fact, Power might be scheduled to a sub-hourly level, e.g., in increments of 5 minutes.
Natural Gas and Crude Oil Refined Products tend to be at the daily level, at least in the US. In Europe, Natural Gas might be scheduled down to the hourly level.
5.1) The above differences should be considered right from the start for CTRM system design.
If you start by designing, for example, a system for US Natural Gas that assumes you can schedule only down to the daily level, you would likely need to start from scratch to get a module to support hourly level power.
An ideal system design would have core elements that are common across all commodities, so best to try to understand the different requirements of the Big Three to chart out the design plans to optimize things.
Introduction to CTRM
Click on this link for a great introduction to CTRM software: Introduction to CTRM Software