Welcome to our deconstruction of how you can do energy trading. We will talk about the factors that affect both oil trading and gas trading. These forex trading tips will guide you as you try to understand the energy markets. If you are new to the markets, consider finding the best forex broker in the world for you, from our forex broker reviews.
Energy trading is not that hard when you know the basics, the rules, and the principles. Oil trading or gas trading is mostly what you will be doing when it comes to energy trading. In the following article, we are going to give you what are virtually forex trading tips that will guide your decisions.
If you are new, it is good that you get the best forex broker in the world for you, from our forex broker reviews. Learning how the energy trading market works is something you will need to make a priority. There are not many topics to worry about here, but you need to make sure that you at least retain the main points.
So, we have compressed the numerous forex trading tips you need to know in this brief article.
Energy trading, as a whole, refers to commodities that are found in the asset class we call 'energy assets.' In this category, you will find the following commodities:
- Crude Oil (US oil or West Texas intermediate crude)
- Brent crude (UK oil)
- Heating oil
- Natural gas
Heating oil and gasoline are principally derived from crude oil. Because of that, their fundamentals are inextricably tied to those of the parent product. Natural gas stands on its own.
In mining, it is located as a layer, found on top of crude oil in the rock formations where they drill.
How Energy Trading Happens
Oil trading and gas trading are not that different. Energy assets are used as raw materials, mostly to fuel things. They are traded on the commodity exchanges, in the form of futures contracts.
Pro Tip: A futures contract is a legally binding agreement to sell or buy a specific commodity/asset, at a particular price, in the future.
What we get from the definition is that:
- The futures contract needs to have at least two parties, the buyer and the seller.
- The futures contracts have a date and a settlement price.
- The futures contract can be settled when the physical delivery of the commodity, happens. They can also be settled on a cash basis. That’s how the energy trading is done on online platforms.
Energy trading where cash is the settlement is called spot trading. The spot here refers to the transaction or trade that is settled on-the-spot. With this, the traders can speculate on whether the price of the energy asset will rise or fall, without participating in the physical delivery of the energy asset.
Oil trading and gas trading can also be done using options. There are many ways to trade options. Most of the energy trading you will be facing here is with the best brokers in the world. It will usually be spot trading.
The orders are often just based on the difference between the entry and exit prices and the direction that the asset moves.
The Driver of Energy Commodities
In energy trading, you will find that the most popular energy commodity (in volume) is crude oil. Everyone in the oil trading and gas trading markets uses crude oil derivations on one way or the other. It is responsible for:
- Fueling the cars, we drive
- The transportation of goods and services
- Powers engines
There is a lot that crude oil does, and we will not list all of it here. You get the point. The world runs on oil right now. In some countries in the world, people still use kerosene (derived from crude oil) for cooking. It is everywhere and commands a lot of activity when it comes to energy trading.
There are two varieties of crude oil. They are:
- Brent Crude
This is the heavier version. It is used as the benchmark for crude oil and has blends known as the Forties, Ekofisk and Oseberg. Crude that comes from Kuwait, Dubai, and Nigeria, falls in this category.
It is more expensive than say, WTI crude.
- Light Crude
This is the lighter version and is represented as West Texas Intermediate (shortened to WTI) or US Oil. It is the benchmark used for NYMEX contracts.
So, What is the Driver of the Crude Oil Prices?
- Natural disasters
- Politics (stability and instability)
- Speculative activity by traders
- OPEC production quotas
- The global economy's state (especially countries with the most significant demand like China and the US)
The way crude oil is priced is a factor in demand and supply. All of the factors we have mentioned affect the supply and demand. They are the drivers that affect oil trading and gas trading.
Let's delve a little more into how they affect the price of the commodity and, in extension, the energy trading markets.
Exploring The Factors That Affect Demand and Supply of Energy Commodity
Let’s dive a little deeper and get started with oil.
The Organization of Petroleum Exporting Countries is a cartel that consists of 13 major oil-exporting economies in the world. At the top of the list is Saudi Arabia. It is the number one producer of crude oil globally and, as a member of OPEC, plays a lead role in the setting of production quotas.
The OPEC cartel countries account for 40% of global production. They meet now and then to decide on the production quotas for members, and sometimes, they limit or halt output to drive up the prices.
So, keeping up to date with OPEC news is an excellent way to know when the energy trading market is about to experience some change.
- Natural Disasters
Take the example of hurricanes on the Gulf coast of the United States, for example. They impact oil. Another example would be the COVID-19 pandemic experienced by the world in 2020.
Things like that are bound to change oil trading and gas trading prices.
- The Global Economies
A global economic recession like the one that happened in 2008 and the instability of the COVID-19 pandemic are good examples of what can cause the prices to drop. During regular occasions, when doing oil trading, you can look at China for directions, by using their GDP and manufacturing numbers.
- Political Instability and Stability
When the politics are not so divisive or harmful, the prices stay constant and sometimes even drop. When the politics change, as they did during the Libyan civil war, in 2010 and 2011, the prices of oil can go to $120 per barrel. The producing nations' political stability affects prices.
- Speculation By Traders
In energy trading, the speculation done by the market can drive oil prices. The speculators invest massive amounts of capital in swaying prices in the direction they want. They can use information that only they are privy to, to make sure that they influence energy trading activity.
So there you go. These are the main factors that affect oil trading and energy trading as a whole. Let’s look at Natural Gas briefly.
The factors that affect Natural Gas prices are the same as other commodities. It is as much subject to demand and supply laws, like any other commodity in the financial markets. these are the factors that affect gas trading and prices:
- The volume produced
- The amounts in storage
- Imports and exports
- The state of economies globally
- The pricing and availability it alternative fuel types
To understand this well, let’s dive a little deeper.
- The Volumes Produced
Natural gas needs massive infrastructure to extract and transport. That is why gas trading is a little more complicated. The switch to alternative fuels whenever a supply shortage is felt affects the energy trading of gas.
When there are plant breakdowns, pipeline disruption, fires, and other repair shutdowns, the price shifts are significant. In gas trading, you will need to keep an eye on this kind of news that affects production.
- The State of Economies Globally
Just like oil trading, gas trading depends on the economies worldwide, to set prices. Mostly, it has to do with the countries that use a lot of natural gas in large quantities and whether or not they can afford to spend money on more or less every year.
When there is a boom in economies, gas trading flourishes as the nations can then step in and buy in large quantities. Power plants and feedstocks for industrial processes are the primary consumers of natural gas. The petrochemical industry uses a lot of gas too.
A boom in manufacturing will require more gas. If you keep an eye on the manufacturing reports, you can tell when there is going to be an increase or lowering in demand.
- Weather Patterns
Severe weather has two effects when it comes to gas trading. There can be disruptions of the supply chain when they have to shut down because of storms and hurricanes. It is common to see this when the hurricane season in the Gulf of Mexico begins.
Severe cold weather can increase demand as people want to keep themselves warm. These are just two weather scenarios and the effect that they can have on the market. This does not just happen during winters. Even unusually hot weather can increase demand for cooling systems.
If there is not enough natural gas in storage to offset the demand, the prices could spike. If there is enough gas in storage in summer, it could get used up and create a demand in the winter. It is all about knowing how much of it there is, how much has been used, how much is being produced, and the demand.
This will enable you to do energy trading of gas with ease. These forex trading tips reveal that being acquainted with these details is the best chance you have, of understanding what to do and when to do it.
- Storage Volume
How much of the natural gas is in storage? It is usually stored in underground storage fields, to provide a backup supply when the demand increases suddenly. It is a way of stabilizing the prices during trying times.
The excess in domestic cases is stored when the demand is low. Winter is when the increase in demand happens. Gas trading is going to be much easier when you can time the spikes and trade with the trend.
Energy Trading In Summary
When it comes to how you can trade the energy assets, here is what you should know. Oil trading and gas trading involve the use of technical analysis, fundamental analysis, and sentiment analysis too. The psychology of the market is critical during high risk and high-tension times.
The key points that you will need to consider are in fundamental analysis, and we have mentioned them here. They are the cornerstone of what you will consider when you want to do energy trading.
To do the technical analysis, you will need knowledge in the following:
- Support and resistance
- Price retracements and extensions
Sentiment analysis will require that you know about the psychology of the active participants in the market. They are what drives the demand for the commodity in any market.
We have buyers, sellers, and uncommitted traders in every market. The uncommitted traders have a tendency to swing the price up or down when they are forced to move from being uncommitted to committed.
Sentiment indicators are an excellent way to guide your oil trading and gas trading. An accurate analysis is critical when you do energy trading.
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When you combine the three analyses, it is when you get the best results. They will show you a more complete and much clearer picture of when there are spikes.
Energy trading seems more comfortable once you know the basics of how the market works. The factors that move oil trading and gas trading are almost the same, but with significant differences here and there.
Knowing the variables and when they change, is your best bet of catching trades before they switch and getting in on them at the right time.
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