Derivatives are tradable financial instruments that derive their value from the value of underlying assets. They are widely used in the hedging of trading positions taken in the underlying instrument. They also can be used for speculation. In essence, an energy derivative involves a bet on the future value of the underlying energy commodity, whether it is crude oil, oil products, electricity, or even refinery margins.

There are three basic types of derivatives contract: forwards/futures, options, and swaps. Derivatives can also be categorized according to whether physical delivery takes place, or whether the settlement is made purely through an exchange of cash flow; and also whether or not they are traded on an exchange. Those traded outside exchanges are known as over-the-counter or OTC derivatives. The markets in both exchange-traded contracts and OTC derivatives have achieved consistently high levels of growth in recent years, with the most dynamic growth seen in the OTC swaps market.