Energy Trading Basics

Energy trading involves the buying, selling or trading of standardized energy futures contracts that trade on the New York Mercantile Exchange (NYMEX), the Intercontinental Exchange (ICE) and a few other commodity exchanges. Energy trading offers traders a diverse range of trading options but energy trading also comes with risks.

What Are the Major Energy Trading Commodities?

All contracts traded on an individual energy commodity on a specific commodity exchange in the energy markets will be standardized when it comes to quality, quantity, time and place of delivery with only the price of the contract being the variable factor.

Major types of energy commodities traded on in the energy markets will include the following:

  • Crude Oil. Since crude oil accounts for much of the world’s energy needs, crude oil futures contracts are the most heavily traded contracts in the energy markets. Crude oil futures contracts are for 1,000 barrels and are deliverable for all 12 months of the year.
  • Natural Gas. Given that natural gas accounts for roughly a quarter of  US energy needs, natural gas futures account for a significant volume of trading in the energy markets. One natural gas futures contact equals10,000 MM Btus (million British thermal units) and are traded for delivery year round.
  • Heating Oil. Many businesses will use heating oil futures contracts to hedge their energy needs. One heating oil futures contract controls 42,000 gallons (one rail car) of heating oil and are deliverable for 18 consecutive months.
  • Unleaded Gasoline. Gasoline accounts for roughly half of all the refined oil in the US. One unleaded gas futures contract controls 42,000 gallon (1,000 barrels) of unleaded gasoline and are deliverable year round.

The Bottom Line About Energy Trading

It is important to remember that energy prices can be extremely volatile because energy is easily the most tactical and politicized product in the world. Hence, energy trading should be considered a risky endeavor for any new energy trader who has not spent a significant amount of time to understand what he or she is trading and what can influence energy prices.

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