Energy trading, also known as energies, is one of the most important and dynamic trading sectors in the world. The energy markets comprise commodities such as crude oil, natural gas, heating oil, ethanol from biomass, and renewables like solar, wind, and hydro. The sector is constantly evolving with changes in technology, exploration, production, and demand. In this article, we will take a closer look at energy trading, how it works, what moves energy prices, and some of the key players in the market.
What are energy markets? Energy markets are commodities that power industry, heat our homes, and more. Traditionally, energy has been considered part of the hard commodity sector, but many traders are beginning to see energy as a separate sector. This is because the energy space includes not only fossil fuels like oil and gas but also renewables like wind power and biofuels. Ethanol and electricity generation are growing in importance as tradable commodities, but at present, the most developed energy commodity trading markets are in non-renewable energy resources such as petroleum.
What moves energy prices? There are several factors that affect supply and demand levels for energy commodities. These factors can range from circumstances such as OPEC cutting production or gas pipeline outages on the supply side, to varying industrial activity levels and economic performance affecting demand. Supply-side factors include depleting global oil reserves causing explorations to fail, OPEC cutting production, political events like the Iran/Iraq war impacting supply chains, weather conditions impacting exploration attempts, exploration costs, and technological innovation like shale oil extraction. Demand-side factors include economic growth accompanied by increased industrial output, economic stagnation leading to decreased industrial output, population growth increasing overall fuel consumption, and seasonality, e.g., consumption of more heating fuel in winter.
Oil trading Oil trading is the most common form of energy trading, with hundreds of millions of oil futures contracts traded daily. As with other energies, traders can take a position on whether they think the price of oil will fall or rise, with the choice of using CFDs, futures, options, or selected oil ETFs. There are several different oil commodity markets available for speculation, because different areas produce different qualities of oil. The two main types are West Texas Intermediate (US oil) and Brent Crude (European oil), but other varieties include Dubai Crude, OPEC Reference Basket, Tapis Crude, and Bonny Light. As with other energies, oil market prices are mostly moved by supply and demand factors but are also driven by future expectations of supply and demand. When supply outstrips demand, prices will fall, and when demand outstrips supply, prices will rise.
OPEC The petroleum policies of 14 countries, mostly in Africa and the Middle East, are coordinated by the Organization of the Petroleum Exporting Countries (OPEC). Founded in 1960, OPEC aims to provide an efficient, economic, and regular supply of petroleum to consumers. OPEC has the capability of impacting oil prices by setting production targets for its members. Global oil supply has fallen every year since 2014 in the wake of depleted oil reserves and subsequent failed explorations, but there are other factors too that impact levels of supply and demand, which are outlined in the general ‘What moves energy prices’ section above.
In conclusion, energy trading is a dynamic and complex sector, with constantly changing prices and factors impacting supply and demand. While oil trading is the most common form of energy trading, there are several other commodities that make up the energy markets, including renewables. Traders need to stay up-to-date with the latest developments in the energy sector and have a deep understanding of the various factors that impact energy prices. OPEC plays a crucial role in the oil markets, and its policies can directly affect the market.
