The energy trading industry has evolved and made real progress over the past few years. The critical elements of the market are the supply and demand of energy products.
For instance, as per reports, the global energy demand will increase by over 30% by 2035. For these reasons, hundreds of customers and suppliers are looking forward to buying and selling different energy commodities.
Though the growth in trading energy is incomparable, one needs to have a thorough knowledge of the market and trading rules. The primary challenge faced by most energy traders is limited or no idea about the market’s rules, rates, and trading platforms.
There are several ways in the industry that can help you trade energy products like crude oil, natural gas, electricity, and others. These energy trading products make it easy for people to buy and sell energy assets and make considerable profits.
This post includes some of the best energy trading products people can use to trade energy.
Let’s go through the details below to know everything about energy trading.
Table of Contents
- What is Energy Trading?
- Why Should You Invest in Energy Trading?
- Main Energy Commodities You Can Invest In
- 1. Crude Oil
- 2. Natural Gas
- 3. Electricity
- Best Energy Trading Products
- 1. Derivatives
- 2. Futures Contracts
- 3. Spot Trading
- 4. Stocks
- 5. Carbon Credits
- 6. ETFs
- 7. CFDs
- 8. Equities
- The Future of the Energy Market
What is Energy Trading?
Energy Trading includes buying and selling different energy commodities, such as crude oil, heating oil, gasoline, natural gas, wind power, or even electricity. Since the value of these energy resources fluctuates unexpectedly, this is what makes them trendy among speculators.
Also, the high demand and large price swings make energy commodity trading one of the top priorities of traders looking to make large profits in the energy market.
Moreover, when trading energy commodities markets, there are several stages, including the development, production, and supply of energy products.
Why Should You Invest in Energy Trading?
The energy market is definitely one of the highly evolving industries with excellent growth potential. Energy plays a significant role in our daily life; it offers comfort, boosts performance, increases productivity, and helps everyone live the life they want.
Also, energy sources trading can increase their availability to the next level, enabling everyone to use as much power as needed to perform their tasks more wisely and effortlessly.
Considering these facts, we can say that energy trading not only matters today but will also continue increasing its importance in the coming time.
Since the demand for energy products is high and surely going to grow in the future, people should consider investing in energy trading.
Main Energy Commodities You Can Invest In
Energy trading involves trading of the following commodities:
1. Crude Oil
Crude oil is one of the highly demanding energy commodities in the market. Though you can find natural oil reserves globally, some countries with top oil energy production are Venezuela, Saudi Arabia, the United States, Russia, China, and Iran.
Since oil is needed in every aspect of daily life, from cars to cosmetics and more, it is an excellent commodity to buy and sell in the energy market.
Crude oil trading requires market knowledge and exceptional skills to make consistent profits from your investment. Before directly investing their money, people looking to trade crude oil and its derivatives must consider several aspects, including what moves this commodity and price history.
Also, crude oil is not a uniform energy product. There are several types of crude oil products based on the characteristics of the raw material, such as origin and gravity. For this reason, there are crude oil futures contracts with varying names, like West Texas Intermediate (WTI), Brent, Hardisty Western Canadian, and Edmonton Light Sweet.
2. Natural Gas
Natural gas is another one of the widely-used energy trading products when it comes to energy market trading. Natural gas is basically a fossil fuel used to produce electric power, further supplied to industrial, commercial, and residential applications.
Coming to natural gas production, the United States, Russia, Iran, Qatar, Canada, China, and the European Union are some countries with the highest production.
Natural gas is used in varying sectors, such as electric power, industrial, residential, commercial, and transportation. For instance, the industrial field accounts for around 34% of annual United States natural gas demand. The industry uses fossil fuels for power and heat systems and as a raw product to produce hydrogen, chemicals, and fertilizer.
Since natural gas is highly volatile, it is one of the most commonly-traded energy commodities that provide traders endless opportunities.
Also, energy firms, including Mabanaft and Phibro, can help you trade natural gas. Moreover, you can buy and sell natural gas through future contracts and contracts for differences (CFDs).
Electricity is a unique type of energy commodity. Several properties differentiate it from other assets, such as natural gas and crude oil. For instance:
- Electricity is fully interchangeable. That means one megawatt hour of electricity generated from natural gas or coal contains the same amount of energy.
- Electricity or energy storage is expensive; that’s why it should be produced and utilized simultaneously to balance the supply and demand of electricity.
The emerging demand for electricity makes it one of the best energy products for trading. Also, if you’re looking to trade electricity, you may do so via electricity stocks, derivatives, and utility ETFs.
These are some of the major commodities in the energy trading market. Others include coal, uranium, ethanol, and gasoline.
Best Energy Trading Products
Now that you know the energy market will expand, you just need to find out the right energy trading products to step into the industry.
To help you kick start with energy market trading, we have researched and listed the 8 best energy trading products or ways that can help you trade different energy commodities and make fat profits. Let’s take a quick look for details:
Derivatives are financial contracts in which energy products, including natural gas, crude oil, or electricity, are underlying assets. They are short-term financial tools that come with a fixed expiry date.
Energy derivatives trading involves buying and selling of different energy commodities. They can help companies or traders make huge profits by predicting the price movement of the underlying energy assets.
Energy derivatives are a critical part of the current financial structure and are widely used for industrial production planning, speculation, and risk hedging. They make it easy for both energy companies and traders to invest in the energy sector.
2. Futures Contracts
Another way to trade energy is to buy and sell contracts on a futures exchange.
Energy futures and forwards contracts enable energy market participants to buy and sell a specific amount of electricity, gas, or other energy assets, at a rate, for settlement on a predetermined date in the future.
The buyer of an energy futures contract is liable to purchase the underlying commodity on the contract’s expiration date. In contrast, the contract seller is responsible for delivering the underlying assets at the expiration date.
Most energy futures contracts don’t end up with the delivery of energy commodities markets. Still, they are used by participants (energy producers, retailers, or consumers) to ensure protection against price risks they might experience in the industry.
Futures generally refer to standardized contracts traded on an exchange, whereas forwards are contracts between two parties with a set of terms that can be tailored to hedge price risks. This hedging system is essential for both small, independent energy retailers as well as large, industrial consumers to avoid loss.
Participants can take part in energy futures trading either on an over-the-counter (OTC) or formal exchange.
The most famous energy futures market is the CME (Chicago Mercantile Exchange) and the (NYMEX) New York Mercantile Exchange. NYMEX belongs to the CME Group, which specializes in energy assets trading.
Other trading venues are the Intercontinental Exchange (ICE) and Tokyo TOCOM.
Energy market participants can use any of these platforms for futures trading. Additionally, over time, futures have become an essential part of the modern financial structure and energy market due to their efficiency in keeping the prices of energy products in check.
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3. Spot Trading
Spot trading is another straightforward way to invest in the energy market. It involves direct purchasing or selling energy products, such as oil, gasoline, power, etc., at a short time frame before delivery.
Under this trading method, traders buy different energy assets hoping that their energy prices will rise in the future, resulting in fat profits. They can sell these assets later when they notice an increased value.
Also, spot trading involves selling energy products on a profit and repurchasing more when the price drops.
In spot trading, you can only use energy assets you’ve purchased; there’s no margin or leverage. Overall, spot trading is for instant trading (buying and selling) of energy commodities.
Other investors looking to enter the energy trading market for a specific energy commodity can invest in the stocks of a company that deals with that particular energy asset.
For instance, participants interested in crude oil can invest in oil drilling firms, refineries, tanker companies, etc.
Stocks are actually considered less prone to volatile price fluctuations than futures. They can be easier to track, buy, hold, and sell.
One significant benefit of trading energy commodities through stocks is that trading is easier as investors already have brokerage accounts. Also, investors can easily access the public info of a company’s financial situation, and stocks are often highly liquid.
Apart from this, one downside of investing in stocks is that their price may vary based on company-related factors that have no link with the related energy asset that a participant is trying to track.
See Related: Best Climate Change Stocks
5. Carbon Credits
Carbon credits provide another great platform when it comes to trading energy. They make it easy for energy market participants to trade varying energy commodities while ensuring sustainability.
Carbon credits are basically “cap-and-trade” policies. Here, the cap represents the ratio of carbon emissions a company can produce.
At the same time, the trade states the ability of a company to purchase and sell carbon credits to increase and decrease their allowed carbon emissions.
That means carbon credits offer excellent opportunities to both companies or individual traders looking to trade energy products to make profits while also lowering their carbon footprint.
In addition, the current rules of carbon credits allow international transfer of credits, enabling domestic and overseas carbon emitters to trade on this platform.
Stands for Exchange Traded Funds, ETFs are investment funds that track underlying energy assets and divide their ownership into shares. Energy ETFs invest primarily in shares of oil, natural gas, and energy companies. The value of energy ETFs varies based on traders’ buying and selling actions.
Since energy Exchange Traded Funds cover a vast range of regions, companies, and risks, they provide something for each trader. Also, the ETF approach offers diversification across the energy market, providing traders with the opportunity to gain exposure without worrying about the risks.
Well, the top three energy ETFs are First Trust Natural Gas ETF (FCG), Invesco Dynamic Energy Exploration & Production ETF (PXE), and Invesco DWA Energy Momentum ETF (PXI).
CFDs or Contract for Differences is another reliable trading platform that enables you to trade an underlying energy commodity without actually owning it.
The CFD price is the rate of an underlying energy product. That means if the value of the underlying asset, e.g., oil, goes up, so will the price of the CFD and vice-versa.
In CFD trading, participants pick the energy commodity markets they want to trade and place their order. When they figure out that the price of a particular energy product, e.g., gasoline, will go up, they buy the gasoline CFD.
Like any other trading, wrong predictions may lead energy market participants to loss. Therefore, one should know the risks involved in CFD trading before investing in it.
Equities are an indirect way to trade energy commodities. Equity trading involves trading a company’s stocks or equities, which are involved in the energy markets. There are several methods to invest in equities; you can buy and sell a company’s stocks through a stock exchange or as OTC (over-the-counter) products.
These are some top ways energy market participants can use for trading energy resources and making considerable profits.
These methods provide speculators with easy access to all the essential details of the energy market, such as high liquidity, low fees, and leverage. To select the right path for energy trading, traders must learn the correlation between different energy commodities markets and economic data.
The Future of the Energy Market
The global energy market is changing and evolving. As countries across the globe are moving towards a technologically advanced world and almost every industry is equipped with energy, the demand for energy commodities is more than ever.
Keeping this in mind, it is predictable that the demand for energy products will continue increasing as we merge into the future. As a result, investors or speculators find it valuable to participate in energy market trading.
On the whole, energy trading is an excellent opportunity for energy market participants to ensure an efficient supply of energy commodities and make good profits.
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Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.
Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.
Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.
When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.