Commonly referred to as the Wild West of the financial markets, energy futures offer participants an array of unique opportunities. From the West Texas Intermediate (WTI) crude oil contract to Henry Hub natural gas, there are a collection of products ready for your engagement.
The listings at the Chicago Mercantile Exchange (CME) furnish active traders with unparalleled flexibility. No matter if you are interested in the heating oil, ethanol, gasoline, natural gas, or crude oil markets, rest assured there is an ideal product for your trading goals.
Energy Futures 101: Key Market Drivers
When it comes to energy futures, there are two basic classifications of contracts: refined and commodity. Each features a collection of distinct underpinnings, most of which revolve around the traditional supply-demand curve.
If you’re an energy market newbie, it’s important to understand that many factors affect the pricing of related products. Here are the most important:
- Geopolitics: Studies estimate global GDP to be in the neighborhood of $85-$90 trillion annually. Accordingly, the industrial prowess of most nations is tied largely to the energy complex and foreign trade relationships. If existing affiliations become strained, global supply and demand of energy products can be dramatically affected.
- Seasonality: The time of year can greatly impact the pricing of energy futures. Demand for refined fuels such as gasoline or heating oil varies in relation to the season. For instance, the pricing of WTI crude oil typically rises during the summer in the Northern Hemisphere. This fluctuation in value is a result of increased travel and demand for refined fuels.
- Economic cycle: Times of economic expansion and contraction can severely influence the pricing of energies. As an example, the COVID-19 pandemic of 2020 slowed global economic growth to a crawl. Subsequently, crude oil prices fell to levels not seen in several decades; gasoline also put in multiyear lows.
The global energy complex is a dynamic atmosphere. Given geopolitical instability, seasonal influences, and economic variance, values can fluctuate quickly and on a grand scale.
Commodity and Refined Products
For all intents and purposes, energy futures come in two forms: commodity and refined. Here’s a quick look at both and the contracts local to each:
- Commodity: Energy commodities are earth-borne, raw materials. Related contracts are West Texas Intermediate (WTI) crude oil, North Sea Brent (Brent), and Henry Hub natural gas. Commodity energy contracts feature consistent liquidity, volatility, and participation.
- Refined: Refined fuels are derived from an underlying commodity. Examples of refined fuels futures are RBOB gasoline, ethanol, and heating oil. Although the liquidity of these listings is sparse in comparison to commodity-based contracts, they play an important role in the hedging strategies of businesses in the travel and logistics sectors.
It’s important to remember that not all energy futures contracts are alike. Each exhibits unique market behavior stemming from distinct liquidity and volatility. For instance, the average daily traded volumes are much larger for WTI crude oil than for RBOB gasoline futures. Subsequently, the depth of market for RBOB futures is much less than that of WTI. This discrepancy greatly impacts the strategic applications of RBOB with respect to WTI.
Want to Learn More About the Global Energy Complex?
Without a doubt, the global energy complex offers traders an array of unique opportunities. From refined products to commodities, rest assured that there is a contract well-suited to help you meet your financial goals.
To learn more about these exciting markets, check out the Energy Futures Overview available online at Daniels Trading. Featuring comprehensive breakdowns of crude oil, ethanol, heating oil, gasoline, and natural gas, it’s a great primer for your venture into the energy markets.
To learn more about energy futures and the natural gas trade, check out our blog, Energy Futures: A Look at the Crude Oil & Natural Gas Trade available online at Daniels Trading. Featuring comprehensive breakdowns of crude oil, energy products and energy volumes, this blog is a go-to resource for anyone interested in entering the energy futures markets.
