In theory, then, trading energy company shares is a way to make a leveraged bet on the price of energy commodities. As the commodity’s price rises, more revenues should flow to the bottom line in the form of profits. However, many factors other than commodity prices can affect the performance of energy company share prices:
Production costs: A rise or fall in the cost of wages or equipment, for example, affects profits. Competition: The strength of competitors can affect the profitability of energy companies. Interest rates: Changes in interest rates can affect the cost of debt servicing. This factor is especially important to utility companies with huge infrastructure financing costs.
Local Economies: The relative strength of the economy where a company sells its products can impact its profits.
Multiple Contraction or Expansion: The market assigns price/earnings multiples to companies based on perceptions of future prospects. Changes to these multiples can cause fluctuations in share prices.
Traders can follow the broad energy markets by monitoring the performance of some of the main indices that track the sector. Energy indices are a good barometer for the health of the sector since they measure the performance of the shares of companies engaged in the production and sale of energy. Energy companies typically have large initial capital costs to develop and explore for resources. Later in their development, they have mostly fixed costs such as salaries, rent, and debt servicing.
Here are the top energy producing countries in the world:
Industrial demand for energy could top 70% by 2040. However, most of this demand may occur in developing economies. According to ExxonMobil, the industrial demand for energy in India will triple by 2040. India and other developing nations in Asia, the Middle East, and Africa will require factories to supply metals, machines, and manufactured goods. This new source of industrial energy demand could offset waning demand from industry in developed countries.
Nearly 1.3 billion people in the world have no access to electricity, including about one-quarter of the population of India. Over the next two decades, India and other emerging countries will trade power grid infrastructures as their economies mature. These new power generators will require some sort of fuel – crude oil, natural gas, coal, nuclear, or renewables – to operate. As access to electricity expands to more economies across the globe, energy needs are bound to increase.
By 2040, the world’s population is expected to exceed 9 billion. Demographers forecast that three-quarters of the world will reside in Asia or Africa at this time.
Projected Word Population Growth – Image via Flickr by Mo Ibrahim Foundation under Creative Commons 2.0
The growing world population will create new competition for energy resources. It will also likely spur new innovation in energy as fast-growing countries struggle to deal with rising demand and constrained energy resources. China and India, in particular, will face the biggest challenges in managing population growth. As the people in these countries move from rural areas into cities, demand for energy will certainly rise. This could have an enormous impact on energy prices.
The anticipated flat growth for energy in developed countries is not due to poor economic conditions. Rather, developed economies in North America and Europe will benefit from greater energy efficiency in the coming decades. More efficient natural gas-fired power plants, smart grid technology, and fuel-efficient cars are some of the developments that could produce a new energy efficiency revolution.
One of the interesting unknown is how far these technologies can advance and how they might change the consumption shares of renewable versus non-renewable energy. Traders can capitalize on these trends by trading energy efficiency technologies.
Traders should pay close attention to economic growth in emerging market economies for clues about energy demand. Similarly, traders should pay close attention to new sources of energy supplies in emerging market countries. China and India, in particular, will have to make important decisions about issues such as ethanol production, nuclear energy programs, and coal-fired power plants. These decisions could have a significant impact on individual commodity prices.
One of the most important trends in energy markets is the disparity in expected energy demand between developed and developing nations. Global energy usage is expected to climb by almost 30% over the next two decades. However, growth in developed nations is forecast to remain flat. In other words, emerging market nations will account for the entire increase. This forecast could have important ramifications for commodity markets.
Several long-term trends could create trading opportunities in energy over the next two decades:
Emerging Market Growth
Energy Efficiency Revolution
Population Growth
Electricity Penetration
Industrialization in Developing Economies
With the exception of ethanol and some electricity generation, the most developed commodity trading markets are in non-renewable energy resources.
In addition to regulated and (mostly) liquid futures markets, traders can trade these commodities indirectly through products such as shares, exchange-traded funds (ETFs), and contracts-for-difference (CFDs).
Crude Oil Crude oil has different variations based on geography and physical characteristics: West Texas Intermediate (WTI), also known as light sweet crude, and Brent Crude are two of the most frequently traded varieties. $0.01 per barrel
NYMEX and ICE Gasoline Commodity markets trade a product known as Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline. In the United States, about 47% of each barrel of crude oil goes to produce gasoline for cars and light-duty vehicles. $0.0001 per gallon
NYMEX Heating Oil This fuel is refined from crude oil and used to heat homes and businesses. In the United States, about 28% of each barrel of crude oil goes to produce distillates such as diesel fuel and heating oil. $0.0001 per gallon
NYMEX Coal Coal is a fossil fuel used mainly in power generation and steel production. $0.01 per ton ICE Futures Europe Natural Gas Natural gas is a fossil fuel used in electric power generation and in a variety of residential, commercial and industrial applications such as heating and refrigeration. $0.001 per million Btu NYMEX Electricity Electricity powers virtually every segment of the world economy. $0.05 per megawatt hours (MWh) NYMEX Ethanol Ethanol is used as a blending fuel with gasoline. $0.001 per gallon NYMEX Uranium Uranium is a radioactive metal used to produce nuclear energy. $0.05 per pound
Petroleum Products – crude oil and various refined crude oil products including gasoline, heating oil, diesel fuel, jet fuel, lubricating oils, and asphalt. Hydrocarbon gas liquids – gas liquids derived from natural gas and crude oil and include alkanes (e.g., propane and butane) and alkenes (e.g., ethylene and propylene). Natural gas – energy consisting mainly of methane that is found deep beneath the earth’s surface. Coal – a sedimentary rock that can be burned for fuel. Nuclear energy – An energy source derived from splitting the atoms of uranium and producing a chain reaction of energy.
The energy we use can be divided into two groups. Renewable and non-renewable. Types Of Renewable Energy Solar Park and Wind Farm – Image by Erich Westendarp from Pixabay Renewable energy accounts for about 21% of global electricity generation and about 12.5% of overall energy consumption. There are five main renewable energy sources: Solar – energy obtained from the sun Geothermal – energy harnessed from heat within the earth Wind – energy harnessed from the natural movement of air Biomass – energy obtained from living matter, usually from plants Hydropower – energy obtained from flowing water In the United States, biomass accounts for about half of all renewable energy and 5% of total US energy consumption. The main biomass fuel is ethanol, which is a clear, colorless alcohol produced mostly from grains or sugar.
The United States annually consumes: 7.2 billion barrels of petroleum (35.9 quadrillion Btu), 27.5 trillion cubic feet of natural gas (28.4 quadrillion Btu) 729.5 million short tons of coal (14.2 quadrillion Btu) Yet, US consumption of these fossil fuels amounts to only 13.6% of total global energy consumption. In other words, the world consumes a staggeringly large amount of energy.
The unit we typically use to define quantities of energy is the British Thermal Unit (Btu), which is a measurement of the heat content of fuels. According to the US Energy Information Agency (EIA), annual worldwide energy consumption exceeds 125 quadrillion Btu and is expected to grow to 138 quadrillion Btu by 2050. To put the enormity of these numbers into context, we can compare them to fossil fuel consumption in the world’s largest economy.
Perhaps more than any category of commodities, energy has the biggest impact on our daily lives. Energy prices affect the cost of virtually everything we consume including our groceries, the clothes we wear, the electronic devices we use, and the gasoline we put in our cars. They determine the costs of heating and cooling our homes, businesses, factories, hospitals, and schools. In fact, a world without energy would be a world without the vital things we need to survive!
Many people think about trading commodities and they get the image of the trading pit, similar to what you see in the movie Trading Places, where Eddie Murphy and Dan Aykroyd corner the market on orange juice futures. While commodities trading may have looked like that in the past, in the 21st century it is electronic and commodities markets can be traded online from all corners of the globe. All that’s needed is a trading account with a broker that offers access to the commodity markets and anyone can trade commodities online.
The traditional way to trade commodities is by using futures contracts. However this is not always the best way to trade commodities. For one thing many traders don’t have a futures trading account. And trading futures requires a fairly large upfront investment. Plus futures involve leverage, and while this can inflate gains, it can also magnify losses. All of these issues can be avoided by using CFDs to trade commodities. Liquidity is never an issue with CFDs, you can get started with a few hundred dollars, and you control the leverage, or lack of leverage, when trading CFDs.
By utilising this automated system, ECN empowers traders of all account types, regardless of their balance size, to access the financial markets with ease and efficiency. Say goodbye to barriers and embrace a world of limitless trading possibilities through ECN.
The most popular commodities for traders are gold and oil. This is because both enjoy excellent liquidity and sources of information. However these are not necessarily the best commodities to trade. The best commodity for any trader is the one they understand the best. One where they have detailed knowledge about the market, or about supply and demand for the particular commodity. It’s this deep knowledge that makes it easier to successfully trade any commodity. And anyone can get this type of knowledge through research and study.
