The past two decades have witnessed a significant expansion in energy markets. The number of commodities that actively trade has exploded, from a few crude oil contracts to a vibrant global market in refined products, natural gas, electricity, and coal. Daily volume and open interest have increased, and trading activity continues to extend to ever longer tenors, particularly on benchmark contracts. More recently, emissions and weather markets have entered the mix. The variety of instruments traded has also increased, with a broad array of swaps and options arising as more sophisticated hedging programs required new mechanisms to effect risk transfer. This trend could reverse in the prevailing regulatory climate. However, the benefits in this expansion in energy markets have been manifold, enabling entire industries to hedge unwanted energy exposure and facilitating the financing of asset construction and exploration.

One characteristic of the growth of energy markets is that the number of traded delivery locations has grown much more rapidly than the set of instruments that can truly be characterized as liquid; liquid in the sense of unambiguous price transparency and significant daily trading volume. Consequently, the risk profiles of many energy portfolios have become increasingly high dimensional, demanding innovative methods to organize information and requiring the design of effective risk metrics.