Energy Trading Explained: What It Is and How to Trade It | TIOmarkets
BY TIOmarkets
|June 7, 2024Energy trading has emerged as a pivotal component of the global financial markets, offering traders the opportunity to engage with a dynamic and essential sector. This article aims to demystify the concept of energy trading, exploring its mechanisms, the various energy commodities available for trading, and the strategies traders can employ to navigate this market effectively.
Understanding Energy Trading
At its core, energy trading involves the buying and selling of commodities such as oil, natural gas, electricity, and renewables. These transactions can take place on exchanges or over-the-counter (OTC), with the goal of profiting from fluctuations in energy prices.
What Exactly Is Energy Trading?
Energy trading refers to the buying and selling of energy-related commodities and instruments. In financial markets, this includes crude oil, Brent oil, and natural gas, among others.
Physical energy trading involves the actual exchange of commodities between producers, refiners, utilities, and industrial buyers. Financial energy trading, which is what retail traders access through a broker, involves speculating on price movements using instruments such as CFDs, futures, or options, without any obligation to take delivery of the underlying commodity.
CFD energy trading is the most common form of access for retail traders. A CFD, or contract for difference, is an agreement between a trader and a broker to exchange the difference in price of an instrument between when the position is opened and when it is closed. You profit if the price moves in your favour and take a loss if it moves against you. The full value of the position is not required upfront: instead, a margin deposit is used, and leverage amplifies both potential gains and potential losses.
The Main Energy Instruments
Crude Oil (USOIL)
West Texas Intermediate, or WTI, is the benchmark crude oil grade for the United States. It is extracted primarily from Texas and surrounding states and is lighter and sweeter than many other crude grades, making it easier to refine into petrol and other fuels. WTI is traded as USOIL.
One standard lot of USOIL is 1,000 barrels. The minimum trade size is 0.01 lots, which represents 10 barrels. The margin requirement for USOIL is 4%, which corresponds to leverage of 1:25. Trading hours run Monday to Thursday from 01:00 to 24:00 and Friday from 01:00 to 23:45 server time, with the market closed on Saturday and Sunday.
The price of WTI crude is influenced by US production levels, inventory data published by the US Energy Information Administration (EIA), OPEC and OPEC+ production decisions, global demand trends, and geopolitical developments affecting oil-producing regions. Weekly EIA inventory reports are a regular source of short-term price volatility.
Brent Oil (UKOIL)
Brent crude is the international benchmark for oil pricing, sourced from oilfields in the North Sea between the United Kingdom and Norway. It is slightly heavier than WTI and is used as the reference price for a large proportion of the world's oil trade. Brent is traded as UKOIL.
One standard lot of UKOIL is 1,000 barrels, with a minimum trade size of 0.01 lots representing 10 barrels. Brent crude tends to trade at a premium to WTI, a relationship known as the Brent/WTI spread, which fluctuates based on relative supply, transport costs, and geopolitical factors. For UKOIL trading hours and margin requirements, check the current contract specifications inside the platform.
Brent crude is sensitive to the same global supply and demand factors as WTI but can diverge based on North Sea production levels, European and Asian demand, and Middle East developments that affect international oil flows more directly than US domestic supply.
Natural Gas (USNGAS)
Natural gas is a hydrocarbon energy source used for heating, electricity generation, and industrial processes. It is also referred to as XNGUSD on some TIOmarkets pages. The primary symbol is USNGAS.
The margin requirement for USNGAS is 3%. For trading hours and swap or financing conditions, check the current contract specifications inside the platform.
Natural gas prices are highly sensitive to weather patterns, particularly winter demand for heating and summer demand for power generation, as well as storage levels, production volumes, and liquefied natural gas (LNG) export activity. Natural gas tends to be more volatile than crude oil on a percentage basis, with price swings driven by short-term supply and demand imbalances that can shift quickly with temperature forecasts.
What Drives Energy Prices?
Energy prices are shaped by a combination of structural, cyclical, and event-driven factors.
Supply-side factors include decisions by OPEC and OPEC+, the alliance of major oil-producing nations that coordinates production levels. When OPEC+ cuts production, prices tend to rise as supply tightens. When production quotas are increased or compliance breaks down among member states, prices can fall. US shale production is also a significant supply variable, as the break-even cost of US shale production sets a practical price floor over longer periods.
Demand-side factors include global economic growth, industrial activity, transportation demand, and seasonal patterns. Strong economic growth in major importing nations, particularly China and other Asian economies, tends to support energy prices. Recessions or slowdowns reduce demand and weigh on prices.
Geopolitical events can cause sudden and significant price movements. Conflicts in major oil-producing regions, sanctions on energy exporters, and disruptions to critical supply infrastructure such as pipelines or shipping lanes can tighten supply quickly and drive sharp price spikes. These events are often unpredictable and can produce gaps in price between trading sessions.
Inventory data plays a significant role in short-term price movements, particularly for crude oil. The EIA's weekly petroleum status report, published each Wednesday, shows changes in US crude oil and petroleum product inventories. A larger-than-expected draw on inventories is typically bullish for WTI, while a larger-than-expected build is typically bearish. Natural gas storage data, also published weekly by the EIA, has a similar effect on USNGAS prices.
The US dollar also influences energy prices. Because oil and gas are priced internationally in US dollars, a stronger dollar makes energy more expensive for buyers using other currencies, which can dampen demand and weigh on prices. A weaker dollar tends to support energy prices.
How Energy CFD Trading Works
Energy CFDs are quoted with a bid price and an ask price. The bid is the price at which you can sell and the ask is the price at which you can buy. The difference between the two is the spread, which is variable and fluctuates with market conditions. Spreads typically widen during periods of low liquidity, around major news releases, and at market open and close.
To open a long position, you buy at the ask price. To open a short position, you sell at the bid price. When you close the trade, you do the opposite: a long position is closed by selling and a short position is closed by buying. Your profit or loss is the difference between the opening and closing price multiplied by the number of units in the position.
Because energy CFDs use leverage, only a portion of the full position value is required as margin. For USOIL at 4% margin, a position of 1.0 lots representing 1,000 barrels at a price of $90 per barrel would have a full position value of $90,000, with a margin requirement of $3,600. A small adverse price movement can produce a loss that is large relative to the margin deposited. Leverage increases both the potential return and the potential loss.
Overnight financing applies to energy positions held past the daily rollover. This is generally calculated on a different basis from forex triple swap. Check the current conditions inside the platform before holding energy positions overnight, particularly for longer-duration trades where financing costs can accumulate.
Calculating Profit and Loss on Energy CFDs
Profit and loss on energy CFDs is calculated as the difference between the opening and closing price multiplied by the number of units (barrels) in the position.
For USOIL, where one standard lot is 1,000 barrels, a 1.0 lot long position opened at $90 and closed at $95 would produce a gross profit of $5 per barrel multiplied by 1,000 barrels, equal to $5,000. A 1.0 lot position opened at $90 and closed at $85 would produce a gross loss of $5,000. For a 0.1 lot position representing 100 barrels, the same price moves would produce a gross profit or loss of $500.
These figures are before spread and any applicable financing costs.
Risk Considerations in Energy Trading
Energy markets can be highly volatile. News events, geopolitical developments, and sudden shifts in supply and demand can produce large and rapid price movements. Leverage amplifies exposure to these movements, meaning losses can accumulate quickly if the market moves against an open position.
Energy markets can also experience gaps, where price opens significantly higher or lower than the previous close, particularly after weekends or following major announcements outside trading hours. Stop loss orders reduce but do not eliminate the risk of unexpected losses, since execution occurs at the best available market price when the stop level is reached, which may differ from the specified level during fast-moving conditions.
Managing position size in relation to available margin is an important part of trading energy CFDs. A margin call is triggered when account equity falls to 100% of the required margin. Positions may be closed automatically when equity falls to the stop out level of 30% of required margin. These levels are subject to change depending on market conditions and applicable regulatory requirements.
Trading Energy CFDs at TIOmarkets
TIOmarkets operates the tiomarkets.com domain under TIO Markets Ltd, authorised by the Mwali International Services Authority (MISA) in the Comoros Union.
TIOmarkets offers 7 commodity instruments including USOIL, UKOIL, and USNGAS, available on MT4 and MT5 on desktop, web, and mobile. Energy CFDs are available on the Standard account (spreads from 1.1 pips, $0 commission, $20 minimum deposit), the Raw account (spreads from 0.0 pips, $6 commission per round turn lot, $250 minimum deposit, leverage up to 1:500 on request), and the VIP Black account (spreads from 0.3 pips, $0 commission, $1,000 minimum deposit, leverage up to 1:500 on request). Spreads are variable and typically higher than minimum figures shown. A Standard account is created automatically on registration. Raw and VIP Black accounts are opened separately via the client area.
All accounts support hedging. The Nano account is not applicable to commodity instruments. A swap-free Islamic account is available: contact TIOmarkets for eligibility and instrument details.
Orders are executed at the best available market price, which may result in positive or negative slippage. Subject to change depending on market conditions and applicable regulatory requirements.
Start Your Energy Trading Journey with TIOmarkets
Ready to dive into the world of energy trading? Join over 170,000 traders in more than 170 countries who have chosen TIOmarkets as their trusted forex broker and trading platform. With access to over 300 instruments across 5 markets, including Forex, indices, stocks, commodities, and futures, you can trade with low fees and robust support. Enhance your trading skills with our comprehensive educational resources and step-by-step guides. Take the first step towards mastering the energy markets by creating a trading account with TIOmarkets today.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.
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Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.
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