In the “Beverly Hillbillies” theme song, it’s called “Black Gold” and “Texas Tea,” but in the world of futures it’s commonly known by its benchmarks: WTI and Brent.
We’re talking about crude oil, and it’s the most commonly traded physical commodity in the world. Crude lies at the core of a large energy trading complex that includes gasoline, heating oil and natural gas — to name but a few. Energy futures may also include electricity, coal and carbon offsets.
Oil market reports in business sections and online typically quote two global price standards, West Texas Intermediate (which is the U.S. light crude) and Brent (a North Sea light variety). Investors look at this pair of benchmarks to gauge where oil prices are heading on any given day.
Crude oil and its derivatives are also closely watched by investors in other markets as well because of its outsized influence on the global economy. Oil is traded globally in U.S. dollars, so its fortunes can be intertwined with the greenback.
Oil prices can make the top headline of the day. In 2008 crude soared to nearly $150 a barrel just before the onset of the big recession of that year. OPEC, the international producers’ cartel, still has a considerable influence on the world prices, chiefly by manipulating output up or down.
Oil, dug up from the ground and drilled offshore, is the feedstock used to make a range of transportation and heating fuels, along with petrochemicals. Oil can impact the profitability of entire industries, and a sharp price increase can wreak economic havoc on oil-importing nations.
Energy for Investors
For the investor, energy futures are traded globally on centralized exchanges, using standardized contracts. In the U.S., the complex is extensive and sophisticated, dominated by trading on the New York Mercantile Exchange, or NYMEX, and the Intercontinental Exchange, or ICE.
The energy futures market is highly leveraged, meaning relatively small amounts of money can control a lot. For example, one oil futures contract gives you control over 1,000 barrels of crude, with prices quoted in dollars and cents.
If the oil price is trading at $40 a barrel, the value of the contract is $40,000. But to buy that contract you may need only to put up 5 percent to 15 percent of the contract’s value, depending on the exchanges’ prevailing margin requirements.
NYMEX provides a range of energy investment vehicles, including Crude Oil Futures (known by its code CL), Henry Hub Natural Gas Futures (NG), RBOB Gasoline Futures (RBOB) and NY Harbour ULSD Futures (HO).
A heating oil futures contract controls 42,000 gallons, and trading is influenced most immediately by weather and refining costs. Alternative fuels and a change in the regulatory framework can disrupt the market over the longer run.
Unleaded gasoline, known as RBOB, is the biggest product refined from crude oil. Demand can be highly seasonal and prices typically rise during warmer months when driving is on the rise.
Natural gas is a key vehicle in the energy futures market and is heavily influenced by weather factors. A chilly winter in the northeastern U.S. northeast can send prices soaring, while a mild winter will have the opposite effect. One contact equals 10,000 million British thermal units.
Trading in the sprawling global energy futures sector is not for everyone due to the significant risks and rewards involved. Investors should always consider their full financial picture and seek professional advice before entering such markets. You may want to contact a representative at Daniels Trading for further expert advice.