What's the energy market?
The hydrocarbon market is as specific as a commodity market can get. Crude oil and natural gas are the most common energy sources that are transported via pipelines, which is the most economic and efficient way to ship them. Sure, you can easily transport crude oil and natural gas in bulk in tankers, but you're not going to get a deal better than with pipelines. However, oil has always been more flexible in terms of shipping and trade. See for yourself: oil tanker transport is a rather advanced segment that is modernised with each passing year; besides, you don't have to retrieve a specialised storage tank like the one you would for liquefied gas.
Oil futures are the most effort-saving way of trading oil in bulk. These are the most actively traded futures when it comes to a commodity. Typically, they are traded on the Intercontinental Exchange (ICE) and New York Mercantile Exchange (NYMEX) in the US, accounting for more than half of all oil trading. But that's not all: Singapore is regarded as one of the top oil trading hubs. Brent, West Texas Intermediate (WTI), Dubai Crude and Oman crude are the main oil benchmarks, which basically means prices of other countries' oil benchmarks are pegged to these primary benchmarks. However, make no mistake: when it comes to the global financial market, it's usually Brent and WTI futures that are traded. They are the MVP of the oil futures market.
Typically, gas contracts are often long-term and can have terms of several years. Pipelines are used for gas supply. Just last year, the share of liquefied natural gas (LNG) barely climbed above 40%; today, LNG demand has boomed on account of irregular shipments of natural gas from Russia to Europe; mainly, we're talking about the spot market. The European spot, or cash, market has seen skyrocketing gas trading activity in the last months, with Europe stepping up its efforts to diversify from its gas dependence.
This is not a complete list of energy sources, of course; you can also name coil among them. But because it is not an exchange commodity, we're not focussing on it now. Besides, you can only retrieve it if you use bilateral contracts. So we can easily say that the spot market for coal has a mind of its own; you can't consider it part of the financial market.
Pricing
The US dollar and euro are traditionally used as the currency in gas and oil trading; but the US dollar is so far the main determinant of the oil price per barrel. In natural gas pricing, US dollars still have the main role to play; but units differ from region to region. For example, the US and UK use a Metric Million British Thermal Unit (MMBtu) as a traditional unit of heat or energy value. European hubs are assessed in euro per megawatt hour or 3.412 MMBtu; post-Soviet countries typically measure their gas in USD/1,000 m3 (or 35.8 MMBtu).
Energy price is highly sensitive to many factors: you have your geopolitical factors, your economic factors, your weather factors, you name it.
Many countries with abundant hydrocarbon resources are politically unstable. It can affect hydrocarbon supplies, and cause price increases; wars can easily decrease production as they are very likely to affect fields. Pipeline transport follows along: the price actually heavily depends on the political situation in the countries it goes through. Should these countries be at odds, you couldn't expect anything good to come out of it. Reading news helps staying in the know, so make it a daily habit.
Here, the logic is pretty straightforward: by progressing, the global economy boosts demand for commodities, which in turn hikes up prices on the international market. Some factors, like global pandemics, certainly don't help matters: the COVID-19 pandemic has left numerous countries counting the cost of the measures and restrictions introduced to save human lives, as it had a deeply dampening effect on the global economy.
Weather conditions comes into play, too; if you remember offshore oil platforms installed all across the globe, you'll know what we're talking about. Storm and hurricane season in the Gulf of Mexico can cause disruptions and knock out oil production. So we can say that severe weather events (some people call them “acts of God”) still have a say in what humanity is doing. A cold winter means a spike in gas demand to record levels, as natural gas is fuel for heating.
There are some seasonal factors, too: summer motorists drive up fuel demand, delivering a sharp price boost for oil.
Some investors tend to overlook industry factors, whereas they are a force to be reckoned with: production volumes, commercial reserves, global production outlook and freight costs are all just a fraction of what could influence commodity prices.
The oil market often responds to decisions taken by OPEC+ countries together with Russia; they are committed to maintaining its stability, pushing back against high oil prices. Oil prices are highly sensitive to everything this organisation does: production restrictions, comments and actions made by OPEC+ members can easily sway them in this or that direction.
Why choose energy CFDs?
Global demand for oil has risen up to 100 million barrels a day, which is a lot, to say the least. Even though many global leaders are set on decreasing the volume produced and consumed, this is highly unrealistic short term. About 1.2 million contracts trade daily on the NYMEX alone; imagine how many contracts it is if we count the total on all exchanges. Mind you, there are a hundred barrels covered by a standard futures contract, with many of those contracts being non-deliverable. If you don't know what it is, they are used solely to exchange cash for speculation. CFDs are basically non-deliverable futures, the only difference is, they have no fixed settlement date. And if you use leverage, then you need less currency than for a standardised contract. That's pretty much it. You might know that contracts can vary in sizes, so you are free to execute trades of any size; you can also open positions to buy and sell, so the sky's the limit here, basically.
Risks
Commodity risk is a crucial element in commodity trading, so investors make sure to monitor their positions very closely as they are exposed to big losses. High and volatile prices pose a myriad of challenges for traders, not to say you have to account for the size of the standardised contract CFDs are traded in. Plus, there's a higher fee and swaps and everything that you wouldn't find if you just took on other financial instruments.
If you make a small investment, then we recommend that you trade in minimum volumes; in other words, tread lightly and be cautious. Do your homework and make sure to monitor the news. Prices can easily change overnight, while you're dreaming of higher profits; standard exchange business hours are not the issue here.
Oil and gas prices are sensitive to the Fed's comments, actions and monetary policy changes. We bet you can easily guess why. That's right: they are traded in US dollars, so the American central bank calls the shots here.
