If you are looking to diversify your portfolio, you have probably contemplated energy trading. Trading in the energy market is now accessible to all. This once quite closed market, trading in the likes of crude oil and natural gas options has now managed to become more accessible than ever to regular traders.
Energy Trading Fundamentals
Energy trading is a form of commodity trading which at its very core means trading in the basic resources required to sustain life. This equates to trading oil, gas, and even electricity. The trade within these markets globally is tremendous in terms of volume. This in itself provides an ideal window of opportunity which many traders attempt to capitalize upon.
In times gone by, energy trading was for only an elite group of high value traders and required an abundance of capital as well as abounding expert knowledge in the energy field. Whilst it is true that the direct trading field of these energy markets is still comprised of the largest oil traders and multi-billion dollar investors, technology has afforded new ways for each individual trader to get into energy trading.
Nowadays, traders can avail the services of a top trading broker to engage in the energy market. This is done largely through CFDs trading at the live market rates from major exchanges where energy is traded, such as the Chicago Mercantile Exchange.
What makes Energy Trading Different from other markets
– Market Volatility
The energy market is typically more volatile than other financial markets. This can simply be put down to the number of influencing factors which are at work within the energy trading market, combined with the levels of liquidity which are active within the market at any one time.
These influencing factors are predominantly external, by nature; this makes the energy market much more unpredictable, leading to increased volatility. Such external factors which can have a huge influence include nature. As an example, natural gas trading will fluctuate when new sources are discovered from nature, likewise oil. In the case of oil energy trading especially, the geopolitical climate can have a huge impact on the market. As happens, if the supply of oil from a major OPEC country is restricted, the market will move significantly.
– Price Formation
The overriding factor which will determine price formation in energy markets is supply and demand. This can be simply explained as, when demand exceeds supply, prices go up, and oppositely, when supply is greater than demand, prices will fall. Again, it is something which is intricately impacted by the external factors at work. This can make for fluctuating short-term prices in a manner which financial traders would typically not have experienced in prior trading markets.
In summary, we can note that whilst energy trading is now increasing accessible beyond an elite group of traders, it still remains a challenging market to anticipate.