Introduction: Energy Trading

Energies are often the asset class of Oil and its derivatives. Though with the evolving interest of the world into alternate power sources, asset classes like wind power, emissions, gas, nuclear power and even electricity are capturing the imagination of investors. Crude oil however, still remains one of the most actively traded commodities in the world.

If you wish to play the energy markets, oil and its derivatives can be added as highly liquid assets to your portfolio that can be traded using several strategies. Also, the last few years have witnessed a sharp increase in energy market volatility, which in turn has ensured strong trends capable of yielding short term swings as well as long term timing returns.

Risk management in relation to crude oil trade however, is a matter of experience and requires a constant watch over market movements so that one can manage their portfolio without falling prey to surprise trends that may take over this constantly active market.

Energy Trading - How can you start?

Trading in energy is carried out through the buying and selling of oil and oil-linked derivatives. You can use CFDs on oil’s spot price, or the prices of oil future contracts or options contracts. Here is how traders can begin their journey into the energy markets:

Oil Spot Price

This format of trading represents the price of buying or selling oil immediately, or on-the-spot. The markets reflect how much value oil or its derivatives are worth right now. Changes in prices are then anticipated and trades are strategically placed to reap profits.

Oil Futures

These trades are placed on the basis of contracts wherein two parties agree to exchange a set quantity of oil on a set date at a set price. These contracts are then traded on exchanges and often used by an investor or a company to hedge against adverse price movements.

Oil Options

Oil options are quite similar to futures contracts with the added rider that you may choose not to trade if you don't want to. There are two types of options - calls and puts. These options are traded depending upon the position you are planning to take.

Energy Trading - What Moves the Market?

When you look at the movement of prices on energy trading platforms , any trends can be attributed to supply and demand of oil in the market. And those factors are influenced by:

OPEC Countries

Participants within the Organization of Petroleum Exporting Countries (OPEC) are the major suppliers of oil across the globe. Companies within these countries that deal with oil and its derivative products have strong control over the total production capacity of crude oil in the world.

Global Economy

In times of economic growth, demand for oil tends to increase to support increased production and distribution activities. When demand exceeds supply, prices tend to go up. This is even more evident in the case of developed countries where with open markets that are freely driven by supply and demand forces.

Product Management Cost

There are also times when analysts predict that economic forces will begin driving business and industrial output towards a slowdown. In such scenarios, when production of oil maintains a steady flow, surplus product is stored for future use. While reduced demand may drive prices lower, added storage cost for oil and its safe management becomes an additional factor that influences overall market performance.

Alternative Fuels and Power Sources

The persistent demand for eco-friendly energy and power sources has been a strong influencer on crude prices, especially in the past decade or so. As the development of new technologies brings better and more efficient power sources to the fore, the demand of oil and its derivatives will definitely be affected.