7 Things You Should Know Before Embarking on Energy Trading

Posted on 17th August 2017
7 Things You Should Know Before Embarking on Energy Trading

Energy Trading allows for the investment in energy products like crude oil, heating oil, gasoline and natural gas. The Energies market is highly volatile and trading in energy assets is always exciting due to the huge impact that global events have on supply. As the consumption of energy assets increase around the globe there is a rise in the values too. Energy assets, particularly oil's huge demand for fuel and industrial purposes per se makes it one of the most important commodities worldwide. Owing to various economic and political factors there is a continuous shift in the supply and demand for oil. And owing to these movements in oil prices there is never a dearth of opportunities for investors to make profits.

Energies are a popular choice for investors and provide an excellent chance to expand your trading portfolio besides hedging your exposure to the currency markets. Energy Trading happens in exchanges and also outside of them on a bilateral basis. The main markets within an energy exchange are the spot market, for short-term trading and the forward market, where the physical delivery of the goods takes place at a future date. However, before embarking on energy trades it is important to assess the market conditions and make an informed decision.

Read on for 7 dynamics you need to know before trading in the energy markets :-

1. Political and economic factors:

Energy asset prices are vulnerable to global economic & political happenings which have a direct impact on their distribution and pricing. While trading in energies these are some factors that you need to keep in mind before deciding on your next trading moves. Market sentiment is also a hugely influential factor in determining the energy prices particularly for short-term speculation that accounts for most of the trades.

2. Global demand and supply:

Wholesale energy prices are determined by the fundamental market forces of supply and demand. One must have good knowledge about these events and how it affects prices so that one can make better investments in energy assets.

3. Weather and seasonality:

This has always been an important driver of energy trading. The profitability and revenues of energy assets depend on weather conditions. Despite great advancements in meteorological science it cannot always be forecast precisely and accurately. Again, non-renewable energies like crude oil and natural gas do not have pre-defined production cycles based on seasons but the consumers do. For instance, the price of oil may spike up during February, March as there maybe an increased demand from refineries in anticipation of the summer months.

4. Production:

Energy commodities extracted from natural resources are termed as primary energy sources. Whenever consumption exceeds production the deficit needs to be accounted for by imports. Fossil fuels are generally the most popular with investors in the energy sector. Increase in production rate in this sector is directly proportional to investments and helps in maintaining market stability.

5. Distribution/shipping:

Distribution of energy assets especially crude oil tends to go through a number of bottlenecks around the world. If tensions arise around those it tends to have an impact on pricing.

6. News and inventory data:

There are various crucial news announcements that tend to come out over the course of each week and month. They also influence trading in energy prices. In particular weekly inventory data is quite significant. Information on US crude oil and gasoline inventory comes out on Wednesday mornings. Natural gas inventories come out on Thursday mornings. Additionally, the demand forecast of agencies like the OPEC or the IEA also can influence trading in energy markets.

7. Pairs trading and energy stocks:

Besides energy commodities investors also trade in energy stocks. Stocks of oil and gas producers tend to act as a leading indicator for energy commodity prices when traders are looking ahead at future earnings for energy producers. Implicit in that are forecasts of energy production and also of the energy price. Stocks therefore reflect attitudes towards future energy prices. Trading in specific oil and gas producers can be influenced by many factors as well such as the company's success and exploration, their financial risk and other factors. Within the energy markets there is also the opportunity for traders to take part in what's known as pairs trades. Pairs trading involves a long-short strategy between two instruments in order to capture relative changes between the two via arbitrage. Some of the better-known pairs trades in the energy market particularly in recent years has been UK crude vs US crude. Of late a wide gap has opened between the two based on changes in political risk. When investors feel that political volatility is rising in the Middle East or North Africa, UK crude tends to outperform. On the other contrary when political risk tends to decrease, US crude outperforms.

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