Energy resources are necessary for ordinary people’s daily lives. Crude oil, natural gas, fuel oil, coal, and gasoline are among these vital resources. Energy assets are traded on commodity exchanges all around the world. Oil and natural gas offer the raw ingredients to produce electricity, which is required for the functioning of many enterprises as well as the provision of power around the world. Cooking is done using natural gas, and heating oil is used to keep the house warm in the winter. Gasoline is utilized as a transportation fuel as well as for other things.
Energy trading is popular among forex traders since it is a different manner of trading global economic events than what FX represents. Many forex pairs, however, are still linked to energy costs, with oil-producing countries’ currencies, such as Canada’s, being particularly vulnerable to oil prices. A Forex broker offering energy commodities provides CFDs on at least a couple of these commodities due to the vast and liquid exchanges that exist for these assets.
Energy trading is the exchange of commodities that fall within the “energy assets” asset class. Commodities in this asset category include:
- Crude oil (US oil)
- Brent crude oil (UK oil)
- Natural gas
- Heating oil
Because heating oil and gasoline are derivatives of crude oil, their fundamentals are inextricably linked to those of their parent commodity. Natural gas is a stand-alone commodity asset that is typically found as a layer of gas on top of petroleum in the geological formations where drilling takes place.
How are Energy Commodities Traded?
Energy assets are primarily employed as raw resources in the production of fuel. Futures contracts are exchanged on several commodities markets. A futures contract is a legally enforceable agreement to acquire or sell a specific asset (such as a commodity) in the future at a specific price.
1) In most futures contracts, there are at least two parties involved: a buyer and a seller.
2) Futures contracts have a price and a settlement timeframe.
3) They can be settled either with the actual delivery of the commodity at issue or on a monetary basis, as is the case with energy trade on online platforms.
Spot energy trading is defined as energy trading in which the settlement is made in cash. The term “spot” refers to a transaction or exchange that is completed immediately or “on the spot.” This allows traders to wager on whether the price of an energy commodity will rise or fall without having to take physical delivery.
Option trading can also be used to trade energy assets. Because there are so many ways to trade options, you can read more about them later. Most of the energy trading you’ll undertake with the brokers will be on a spot basis, with long and short orders. These orders are solely based on the price difference between the entry and exit prices, as well as the asset’s movement direction.
The following are some of the more well-known commodity markets where energy is traded:
- EEX (European Energy Exchange)
- CME Group (Chicago Mercantile Exchange)
- NYMEX (New York Mercantile Exchange)
- ASX (Australian Securities Exchange)
- The NYSE Euronext
- TOCOM (Tokyo Commodity Exchange)
- MCX (Multi Commodity Exchange).
What Drives Energy Commodities?
In terms of the volume of energy asset trading, crude oil is the most preferred energy asset. Crude oil derivatives are used by everyone in some way: for personal vehicles, transportation of goods and services, engine power, and so on. Kerosene (a crude oil derivative) is still used for cooking in several nations. As a result, there is a lot of trading movement in the financial marketplaces for crude oil.
There are two types of crude oil:
- Brent crude, which is the most potent variant. It includes the Oseberg, Ekofisk, and Forties mixes and serves as the global benchmark for crude oil. Crude coming from Dubai, Kuwait, and Nigeria is also included in this category, and it is more expensive than WTI crude.
- Light crude (also known as US oil or West Texas Intermediate) is a lighter form of heavy oil (WTI). The NYMEX contract uses it as a benchmark.
What determines the price of crude oil?
- OPEC’s production quotas
- Natural calamities
- Speculative Endeavors
- Instability in politics (in exporting countries)
- Global Economic Situation.
Crude oil pricing is decided by the market. All the factors have an impact on either demand or supply.
What variables influence natural gas prices? Natural gas prices, like other commodities, are affected by demand and supply fluctuations. Natural gas prices are influenced by the following factors:
- Production quantity
- Storage volumes of natural gas
- Weather patterns
- World Economy Situation
- Alternative fuel pricing and availability.
Trading in Energy Assets
Fundamental analysis, technical indicators, and sentiment analysis are all used in the trading of energy assets (psychology of market participants). It will take a long time to delve into each form of analysis. The most important factors to examine in the basic analysis have already been highlighted. But suffice it to say that to trade with technical analysis, you must be familiar with the following:
- Support and opposition
- Patterns on the graph
- Price extensions and retracements.
Sentiment analysis necessitates an understanding of market players’ psychology, as this is essentially what drives demand for any product. There are buyers, sellers, and uncommitted traders in every market. When a fundamental factor drives them to move from being uncommitted to being committed, uncommitted traders tend to fluctuate the price of the asset to the north or south (either to buy or sell). Knowing the dynamics of the market, as well as using tools like emotion indicators, depth of market tools, and market profile markers, may help traders make accurate predictions about whether crude oil or natural gas prices will rise or fall.
When all three types of analyses are integrated, the best findings are obtained. It’s also useful to know where institutional traders are headed with their trades, as their enormous trading volumes normally influence the markets.