The energy forward curve

Energy forward curves generally exhibit certain common characteristics; notably,
forward curves in the USA are based upon a wheel and spoke design. A small number
of strong trading hubs exist that, relative to the remaining parts of the market, are
very liquid. In addition, liquidity has been enhanced by the formation of exchangebased
contracts (in particular NYMEX and the IPE) as well as OTC (over-the-counter)
trading.
The currently developed trading hubs do not represent a product that all the
buyers and sellers want, but a particular quality and delivery point that can set a
transparent and ‘unbiased’ benchmark that the industry can price around. Trading
away from these hubs are normally done on ‘basis’. In other words, premiums or
discounts are paid depending on the differential value of the product compared to
the hub product. This differential may reflect a higher or lower transport cost, quality
or locational supply/demand conditions.