AN INTRODUCTION TO
ENERGY COMMODITES

Often billed as the arena for the trader’s trader, energy futures display certain fundamentals that set them apart from other commodities trading. Indeed, very literally what  fuels the world, energy futures trading is a game with high stakes, as it deals in non-renewable resources.

Sugar and wheat can be seasonally cultivated, but oil and gas reserves need to be discovered and extracted as a single project before moving on. Once lifted, oil, gas and coal will never be replenished in a meaningful time frame. As a result, these commodities remain highly desirable and are readily impacted by global events.

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ENERGY FUTURES FROM THE COALFACE

Price directions can show volatility in energy futures, as a host of potential inputs and events may trigger fluctuations. Political unrest or resolution are prime contributors, as are the less severe bouts of politicking between nations, as well as fundamental supply and demand dynamics.

As each country across the globe finds itself in its own status quo on oil in particular, massive consumers like emerging China and India contribute to a sense of scarcity, with accompanying constant price pressure.

Energy futures are fundamentally different to other commodities future. Everyone needs to eat, its true, but they don't have to eat wheat. The same cannot be said of energy commodities, as there are limited options and they are employed extensively.

In a way, this makes energy commodities "easy" to trade. Business doesn't get better than selling everything one produce. No one dumps unwanted oil. On the other hand, by the exact same token the arena is equally fraught too. As such essential, basic inputs into every nation's well-being, traders encounter strong underpinning alongside bold moves in the energy commodities markets.

All valuable commodities demonstrate that value in trade. Only energy commodities, however, face a market hunger that outstrips current demand. Although the savvy of some regulation on price and supply exists, all energy commodities are hotly contested, albeit with a fairly stable range. There exists a low-key but persistent wrestling for options on energy commodities, making for the kind of trading opportunities only market volatility can present.

The energy markets typically manifest an absence of radical price spikes, due to constant demand and the potential for serious social fallout in the event of short supply. To some degree oil, coal and gas make everyone a gentleman. Vested interests have also struck a fine balance between supply, demand and price, not looking to spur competitive alternative energy sources any more than necessary. We might all need cleaner and more abundant energy, but there's no sense in rocking the boat if you're BP, for example.

More than any other commodity, fossil fuels impact democratically on most human lives on earth. The price of these fuels have an impact on the cost of mobility clothing, groceries, and our connectivity to an online world.

Especially in Northern climates, commercial and residential heating and cooling are also hugely impacted by energy commodities' availability and price. A constant dynamic with this commodities trade is the fact that these resources are expensive to both discover and extract. As resources shrink, improved technologies allow for easier discovery and more efficient extraction, but the constant backdrop of scarcity persistently offsets downward pressure on prices that these improvements might enable.

COMPETITIVE SPREADS

Product Symbol Exchange Product margin Indicative spread (pips) Average spread (pips) Typical spread (pips) Trading hours Timezone
Natural Gas NATGAS.fs NYMEX 10% 8 1.153 1.1 Sunday 17:00 - Friday 15:59 Chicago
UK Crude UKOIL N/A 10% 3 3.06 3 18:00 Sunday - 16:59 Friday New York
US Crude USOIL N/A 10% 3 3.219 3 18:00 Sunday - 16:59 Friday New York
WTI Crude Oil Futures WTI.fs CME 10% 3 3.001 3 18:00 Sunday 16:59 Friday New York

DO YOU HAVE ANY QUESTIONS ON Energy ?

TRADE ENERGY: CRUDE OIL

Petroleum and petroleum products lead the pack of precious fossil fuel energy commodities. From crude oil comes an assortment of refined oil products that include gasoline , jet fuel, diesel, heating and lubricating oils, as well as asphalt. Closely aligned are hydrocarbon gas liquids, being liquid gas derived of both crude oil and natural gas. Alkenes like propylene and ethylene, and alkanes such as butane and propane fall into this category.

TRADE ENERGY: NATURAL GAS

Natural gas and coal are persistent rankers too, with methane being the most commonly mined natural gas, drawn from deep beneath the planet's crust, while coal is mined and milled for combustion. Nuclear energy might seem far more renewable, but the uranium essential in reaction is spread is spread thinly over the globe, and is both dangerous and expensive to work with.

To snapshot the truly planetary consumption of energy commodities, we need look no further than the United States of America. The US consumes around 7.3 billion barrels of oil per annum, almost 78 billion cubic meters of natural gas, and three quarters of a billion tons of coal. That is the vast appetite of one of the world's biggest economies, yet it is noteworthy that the US only accounts for just under 14 percent of global consumption on a yearly basis.

TRADE ENERGY: OIL ONLINE

Oil and gas might be known and "stable" commodities withing existing trading circles, but there's plenty of volatility for long or short positions to score. Combined with the constant competition and unwavering demand, it means an online energy trading account should be a basic portfolio tool for every savvy investor.

Although it is unlikely for a dramatic ending to any one fossil fuel, it is known, that it will run out one day. The great future hope of both traders and average citizen lies in renewable energy. The unavoidable swith from fossil fuels to renewable energy sources also predicts a moment of massive transition, where traders can capitalize and use as one potential strategy to take profit from emerging alternatives.

Trading energy futures is set to change in coming times. Solar and wind power are quickly becoming mainstream alternatives that lack the dirt and dirty politics of oil, coal and gas. Another somewhat obscure energy source manifests in ongoing geothermal harnessing. Heat from deep within the earth itself can offset some of our dependence on existing fossil fuels. Wind power is possibly the cleanest and most promising resource, with wave power another contender for clean renewable energy too.

Traders have been quick to recognise the advent of biomass energy, which is energy usually extracted from plant tissues, possibly due to its similarity to crude oil. It already accounts for some 6% of US energy consumption, most commonly encountered as ethanol derived of sugar or grain crops.

Ethanol feels most familiar to traders as it presents itself as a modest substitute, one that can maintain the old systems without too much reworking. Water has long been the power behind hydro-electrics, but more nuanced and innovative harnessing of natural water flows are also manifesting as the old order shrinks.

THE IMMEDIATE FUTURE OF ENERGY FUTURES

A further twist to an evaluation of the energy commodities market is that developed countries are expected to taper off and maintain current levels of consumption, while emerging markets are anticipated to re-enact the developing cycle the world has seen many times over. Their demand for fossil fuels is growing exponentially, with China leading the pack, consuming huge amounts of available fuels. Total global energy demand is anticipated to climb some 30 percent by 2040.

Emerging markets are expected to account for that whole increase in consumption, as developed markets typically seek alternatives with greater cost efficiencies. This is a noteworthy and looming shift in the commodity markets. Many traders watch emerging markets carefully - and not just forex traders - for signs of the emergence of next-level demand from these countries.

Likewise, developed countries' shift toward clean energy presents a massive investment and growth arena. From a volatile yet broadly known marketplace, population growth and widespread urbanisation in India and China, for example, might yet prove to be the principal driver of the biggest shift yet in energy commodities.

It is unknown as to when and to what extent renewable energy will come to usurp fossil fuels as the world’s driver, but the current predictions seem unavoidable. Savvy traders keep tabs on global demand and imagined scarcity, as they are fundamentals of trading energy futures and options. As resources dwindle or become more far-flung and expensive to extract, the population dynamics of the globe are set to compound the current homeostasis, and have an enormous impact on energy commodity prices going forward.

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