Energy commodities are the raw materials used to produce electricity and fuel our vehicles. They include coal, natural gas, oil, nuclear fuels, and renewables such as wind and solar power. A wide range of energy commodities provides society with all their power needs at a cost they can afford.
Energy commodities are goods and services traded on global energy markets. The different types of energy commodities include oil, natural gas, coal, uranium and electricity.
How to trade in energy commodities
For the purpose of trading these energy commodities, several exchanges have been created around the world. These exchanges primarily facilitate futures contracts that allow producers and consumers to sell or buy financial instruments related to a future price of an underlying commodity at a specific time in the future.
Factors that influence the price of energy commodities
In most cases, the price of an energy commodity is influenced by the same factors that would affect the price of any other commodity. These factors include market supply and demand; manufacturing, transportation and marketing costs; governmental policies regarding taxes, tariffs and subsidies; political tensions abroad; and weather conditions at home.
For example, a severe cold wave in North America or Europe can significantly increase natural gas consumption for heating purposes, which will result in a higher price for natural gas futures contracts on a U.S.-based exchange. In turn, this higher price might trigger increased demand for electricity to meet additional heating needs and increased production from electric generators that use natural gas as their primary fuel source.
The opposite can also be true. If a severe heatwave were to hit the northern hemisphere, electricity consumption for cooling purposes would increase and potentially result in a higher price for electricity based on increased demand.
3 Types of energy commodities
Here are the three primary energy commodities:
Crude oil is one of the essential energy commodities because it supplies 40% of global energy demands and accounts for 33%-35% of all publicly traded securities worldwide. In terms of trading volumes, crude oil is the largest commodity market with an average daily trade value between $50-60 billion.
Natural Gas is a hydrocarbon that consists primarily of methane. It is a non-renewable resource. Fossil fuels such as natural gas and oil formed from decaying organisms thousands of years ago.
Natural gas has some drawbacks as well. Its main component, methane, is a potent greenhouse gas. Methane leaks during the process of extraction and transportation can make natural gas more harmful to the environment than oil or coal usage.
Coal is another non-renewable resource that is used around the world every day. It’s been used for centuries because it’s easy to extract from mines and ignite by itself, so it doesn’t need to be combined with other fuel sources before use. Coal is found around the world, but mainly in North America and Asia.
Coal has significant advantages over other energy sources such as natural gas and oil. It’s abundant and easy to obtain, so it is the cheapest fuel source available worldwide. Unlike oil and natural gas, coal isn’t controlled by a few countries or companies, so there is more competition throughout the industry which can lower prices even from where they are now.
Renewable energy first overtook coal as the largest source of new electricity capacity last year. It has been increasing due to technology improvements that have reduced costs along with tax breaks or other incentives provided by governments that have encouraged people to invest in green energy. There is still some way to go before renewables account for a large part of the world’s energy mix.
Suppose you are new to trading and are interested in energy commodities. In that case, we recommend you contact a reputable online broker from Saxo Bank and start trading on a demo account before investing your own money.
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