You may be well aware of the benefits of trading currencies and the fact that the forex market opens up a world of opportunities for you. Similarly, there are other markets as well which present great opportunities for you. One such market, the energy market, includes petroleum products, natural gas, and even a few exotic items such as heating oil.
Before anything else, one of the first aspects you need to be aware of prior to involving in energy trading is to find out whether your broker offers contracts for difference (CFD) trading. If not, you will have to look out for a futures broker. Though the CFD markets often tend to move in tandem with the futures markets, a slight difference has always been observed. However, the difference is not very significant and would not impact your trading results. Now, the real question you must ask yourself is which futures broker is affordable for you.
This is because futures contracts are considerably more expensive and are believed to present a “one-size-fits-all” kind of situation. Further, if you decide that you will trade futures contracts in crude oil in the U.S., the margin required for each contract will be to the tune of $5,000 or more. However, a CFD broker allows you to trade for much smaller amounts when compared to the standardized futures contracts. As you get access to a smaller tick value, the margin requirement also comes down.
Fundamentals are applicable to energies
You may probably be used to viewing currencies as reflecting the economic situation of countries. Energies should also be looked at in the same fashion. For instance, when we approach the colder northeastern part of America in the latter part of the year, the value of natural gas often goes up. This can be attributed to the fact that the United States consumes higher amounts of natural gas during the winter season. During this time, the market participants often tend to focus on short-term inventory gains and losses.
The crude oil market is another market you can look at. The price of crude oil might rally when tensions prevail in the Middle East region. In the event of any conflict cropping up or the possibility of a disruption in supply arising, the price of oil shoots up. When the tension eases, the price of oil comes down. During the middle of this year, supply from Libya supply was disrupted and this drove oil prices higher. However, the prices declined when the ports were opened once again.
The changes in the value of the US dollar is important
A change in the value of the greenback may not impact the price of natural gas, but crude oil is extremely sensitive. This is because the price of crude oil is denominated in US dollars. For instance, imagine that the price of crude oil is $75 per barrel. When the greenback’s value rises, crude oil will cost less.
Economic data is also equally important
It is important that you keep in mind the fact that energy is very sensitive to the economic data. For instance, a strong global economic situation is generally positive for the energy markets. This is because energy is required for growth in the manufacturing and transportation sectors. This has a cumulative effect on both natural gas and crude oil as they are essential to power large industries and shipping, among others. When there is an increase in commerce, the energy consumption will also increase. This drives demand.
Energy prices work as an indicator at times
One of the aspects as regards energy trading is that some people use electricity and some others need natural gas, while crude oil consumption may be higher at some other places. For example, a higher consumption of crude oil provides an indication that the economies around the world are growing. If it happens in China, considered the factory of the world, it means that a large amount of energy is being consumed to produce the goods they ship to countries around the world. They will have to use energy for powering the trucks and boats that carry their produce.
Related: How the Price of Oil Affects Alternative Energy
Employment Change in the United States of America, and seasonality
Nonfarm Payroll (NFP) provides information about the changes in employment in the U.S. This data significantly influences the energy markets as energy requirement rises when the number of people employed is more. Further, the energy requirements will be different during different seasons in the U.S. During the summer season, it is very common for the families in the U.S. to go on long drives. This drives gasoline, a product derived from crude oil, consumption up.
Energy markets are not equal
In general, it is important that you be with the large and liquid energy markets. The most liquid energy markets are West Texas Intermediate Crude, Light Sweet Crude, Brent, and Natural Gas. You can also trade Heating Oil, but such markets are not very liquid when compared to the larger energy markets. They may also experience a great deal of volatility. You will have to spend a lot of time to understand the demand and supply for such energies, but the margin offered does not justify the time invested in some of these contracts. Typically, such energy markets are often dealt with by hedgers and not day traders. Therefore, it makes sense to stay liquid markets when it comes to trading energy markets.
Use currencies as a substitute
If you want to avoid dealing with the energy market, you may make use of certain currencies as a substitute. However, you must know that inflation has a significant impact on these currencies. That said, there are a number of currency traders who specialize in buying and selling the Canadian dollar, Mexican peso, and Norwegian krone, among others, as they mimic both the demand as well as the price of crude oil. This is because they are all key oil-producing countries. Therefore, the values of the currencies these countries tend to mirror crude oil’s price in relative terms.
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