Intermediate

Mastering commodities

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Deep dive on energy trading

4-minute read

Two categories of commodity comprise the majority of trading: energies and metals. Let's take a closer look at each, starting with the assets that fuel the global economy.

Recap: What are energy markets?

Energy markets, or energies, are commodities that power industry, heat our homes and more – for example, crude oil and natural gas.

Traditionally, energy has been considered part of the hard commodity sector, but this may be becoming less appropriate, with many traders beginning to see energy as separate.

This is because although the energy space includes fossil fuels such as oil and gas, it also features 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.

Energy markets comprise assets including:

  • Crude oil
  • Heating oil
  • Natural gas
  • Ethanol from biomass
  • Renewables (solar, wind, hydro)

The markets for electricity, natural gas, oil and renewable energy are complex and constantly changing. Prices change minute-by-minute for most energy commodities, providing opportunities for knowledgeable traders with an understanding of the sector.

What moves energy prices?

There are a variety of factors that affect supply and demand levels for energy commodities. These 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.

Here's a more complete picture of some of the factors at play:

Supply

  • Depleting global oil reserves causing explorations to fail
  • OPEC cutting production
  • Political events, such as the Iran/Iraq war impacting supply chains
  • Weather conditions impacting exploration attempts
  • Exploration costs
  • Technological innovation–e.g.to enable shale oil extraction

Demand

  • Economic growth, which is accompanied by increased industrial output
  • Economic stagnation, which leads to decreased industrial output
  • Population growth, increasing overall fuel consumption
  • 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.

With FOREX.com, you speculate on spot prices or futures with CFDs, although there are some oil industry ETFs available too.

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
  • 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. As outlined above, 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.

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Test your knowledge

Question 1 of 3
Which of these types of crude oil is most commonly traded?
  • A West Texas Intermediate
  • B Dubai Crude
  • C OPEC Reference Basket
Question 2 of 3
How many member countries does OPEC have?
  • A 12
  • B 13
  • C 14
Question 3 of 3
How do you trade oil with FOREX.com?
  • A CFDs
  • B Options
  • C Spread betting