Our practical guide to energy trading for beginners will help every reader understand the fundamental role of the energy markets and energy trading. Designed to support every individual in confidently starting their energy trading journey, this guide covers exactly what products are traded on the energy markets from a global perspective. We will also explore the different trading instruments used and how energy is traded across different regions.
With our guide created to support beginners to energy trading using practical tools, tips and key takeaways, we will also look closely at how energy trading platforms and exchanges work, including the use of CFDs in energy as well as the key players in the energy trading ecosystem to help every individual understand the topic from the ground up.
What Is Energy Trading?
Energy trading is defined as the buying and selling of energy commodities, with the energy markets acting as the platforms on which these commodities are bought and sold. Some of the most popular commodities include crude oil, natural gas, energy, power and renewables (including solar, wind and carbon credits).
Energy is a major global commodity because energy in all its forms is constantly in demand across the globe. Every country needs and uses energy and power in some form and it is in high demand on both an individual and corporate level. Some of the most common areas in which it is essential are:
- Transportation: Covering gasoline, diesel and jet fuel with everything from cars to local public transport and global air travel for both people and goods
- Technology: Such as data centres and communication networks
- Agriculture: For example, powering farm equipment
- Heating: From individual homes to skyscraper offices
- Manufacturing: Factories rely on electricity, oil, gas, or coal.
With such a diverse and constant global demand for energy in all forms, it’s easy to see why there are so many opportunities associated with trading on the energy markets. It is not only the consistency of demand but it’s also the volume – crude oil trading alone represents one of the most traded commodities on the planet.
Energy is a major factor in geopolitics and a leading indicator in macroeconomics – every price shift has significant knock-on effects across the market because, quite simply, no country or business in the world can function without it. ETFs, CFDs and futures contracts are some of the most popular instruments used to trade energy – we will explore these more later in the guide.
Types of Energy Markets and Instruments
Due to the diverse nature of energy, there are many different types of market on which it is traded and ways that traders can access opportunities. The energy markets use benchmarks as a common reference price point for all types of energy - as energy is produced in many grades and across every global region, this helps to improve transparency and streamline trading.
Wholesale vs. Retail Energy Markets
On the wholesale energy market, buyers including power generators and producers, large-scale traders and financial institutions buy energy in bulk (a generator-supplier relationship). Typical buyers might be a wind farm who will then sell electricity on to their suppliers.
On the retail energy market, energy is purchased directly by the end user (consumer), e.g. homeowners or businesses buying energy directly from the suppliers for their personal use.
Physical vs. Financial Energy Trading
Traders should also understand the difference between physical and financial energy trading. Physical involves movement and delivery of the physical commodity itself, with typical stages of the trading process including the storage of commodities, transportation and completing regulatory compliance especially when trading across different global regions.
In contrast, financial energy trading does not encompass any physical commodity at any stage. Instead, it involves the use of derivatives and a range of different trading instruments to speculate or hedge against price movements.
Contracts, Futures and Swaps
Contracts, futures, and swaps are all instruments used in energy trading that allow users to buy, sell, hedge, or speculate on market price movements. The chosen instrument for each individual trader will depend on experience as well as trading ambitions, risk appetite and preferred strategic approach.
Energy derivatives such as CFDs are traded by everyone from producers and consumers to governments. They are an effective way to begin a trading journey as they allow individuals to speculate on the price movements of energy commodities without owning the underlying asset. Investing in ETFs is another route suited to those who prefer a low-risk exposure via tradeable funds that track energy prices.
Oil, Gas, and Electricity Trading
Understanding where and how the major commodities are traded is important for effectively navigating the energy markets and trading on a deeper level.
Oil
Oil is in high demand globally and typically traded on The Intercontinental Exchange in London (using the Brent Crude benchmark), the NYMEX in New York (WTI Crude benchmark), the Dubai Mercantile Exchange (Oman Crude benchmark) and the MCX (Multi Commodity Exchange) in India (Brent Crude benchmark and WTI for contracts), using a variety of regional, financial and domestics future and options contracts.
Oil is also traded OTC (over the counter) using swaps and contracts with key players including oil majors, airlines and governments, as well as on spot and physical markets (for physical crude oil) and via broker platforms such as Bloomberg for institutional traders.
Volatility factors include currency movements, production decisions and supply chain disruptions while demand cycles typically see higher demand during the summer months due to a high level of global travel and during winter when more heating is needed. Global economic growth also has a direct impact on growth in industrial oil usage.
Oil is one of the most high-profile factors in the geopolitical landscape, with the impact witnessed especially prominently during conflict in oil-rich regions or when sanctions are placed on key regional producers.
Electricity
Also referred to as power trading, electricity trading predominantly takes place across three key regions:
- In the US on the ICE exchange, as well as the bilaterial and regional markets
- In Europe on the EEX and Nord Pool exchanges
- In Asia on the JEPX and AEMO exchanges
Benchmarks work slightly differently in electricity trading because it is not a commodity that can be effectively stored at scale. Therefore benchmarks are usually based on day-ahead market prices on specific exchanges or regional market price points.
The most significantly volatility drivers include the great variability in renewable output, especially with the scale at which he renewables energy trading is developing. Electricity markets are also subject to factors such as grid constraints and outages as well as weather, temperature and seasonal changes where demand can spike or fall dramatically.
In line with volatility factors, demand cycles are based on high demand in summer for cooling devices such as air conditioning as well as high demand in winter for heating. Electricity is also prone to daily cycles, such as higher requirements in the morning and evening.
Just like other energy sources, electricity has significant geopolitical impact – for example, carbon trading is impacted by changing carbon market rules as well as supply chain issues and changes in energy policy.
Natural Gas
Natural gas trading is conducted in the US using the NYMEX exchange and the Henry Hub benchmark; in Europe on the ICE and EEX exchanges using the TTF (Netherlands) benchmark and in Asia over the counter and via S&P Global Platts using the JKM (LNG) benchmark.
Volatility in the gas markets is based around factors include pipeline disruptions, extreme weather (e.g. ice/snowy conditions or heatwaves) and storage levels. Just like electricity, demand cycles are mainly driven by heating in winter and summer cooling demands which see seasonal demand surges. The geopolitical impact of natural gas is far reaching, including sanctions and pipeline politics.
How Energy Trading Platforms and Exchanges Work
Energy trading is conducted via both over the counter markets and exchanges. The key ones to familiarise yourself with include:
- The Intercontinental Exchange (ICE)
- One of the world’s largest commodity and energy exchanges typically used by professional traders and bodies such as banks, energy companies and hedge funds
- Trading in crude oil, natural gas, power, coal, carbon emissions.
- Offers futures and options contracts
- The European Energy Exchange (EEX)
- Covers electricity, natural gas, carbon credits (EU ETS), and renewables focusing on the European energy markets
- Offers spot and derivatives trading (futures, options).
- Typically used by utilities companies, industrial consumers and financial institutions
- Over The Counter markets (OTC)
- A booming section of the market where trades are made directly between trading partners on trading platforms or with the use of a broker via brokerage companies.
- Users are typically large corporations or banks
Under the banner of Over the Counter trading, there are a number of reputable energy brokers helping traders gain access to key opportunities via derivatives trading. ActivTrades offers a popular type of (derivatives) financial energy trading using CFDs (Contracts for Difference).
CFDs do not require any physical ownership of the underlying asset, meaning no costs associated with storage of transport of such commodities. Instead, CFD trading allows users to speculate on price movements to buy or sell at key times (when prices are expected to rise or fall).
Often used with short-term trading styles such as intraday or scalping, CFDs trading on the energy markets is increasingly popular. Reputable brokers, like ActivTrades, offer a number of key features to enhance the trading experience. This includes leverage, allowing traders to access larger positions with only a small margin, and 24/5 access to the markets.
Who Are the Players in Energy Trading?
The energy trading ecosystem essentially incorporates two types of end-to-end journey - the first sees energy being traded through physical delivery (a process that also includes storage and transportation) while the second sees energy being delivered in a more figurative context, using financial means with instruments such as future contracts and CFDs.
The key players work effectively both in tandem and on an individual level as part of a broader system to meet ongoing supply and demand, as well as navigate volatility in the markets.
The key players in the energy trading ecoystem can be defined as follows:
- Energy producers: This is defined as anyone that extracts, generates or supplies raw or refined energy, including everything from fossil fuels to renewable sources. Examples of producers include oil and gas companies, and renewable energy firms.
- Brokers: They operate in both physical and financial markets, acting as intermediaries between energy buyers and sellers
- Exchange: Unlike over the counter (OTC) markets, exchanges such as the ICE and EEX use benchmarks for energy trading and standardised energy contracts, such as futures for trading
- Utilities: Companies such as EDF that purchase energy on the wholesale markets and sell the energy directly to consumers
- Financial traders: Anyone who trades energy derivatives, such as CFDs, such as hedge funds and retail traders (using broker platforms).
Strategies and Risks in Energy Trading
The most common energy trading strategies consider seasonality, storage arbitrage and hedging. We briefly outlined the concept of seasonality above, where demand peaks for certain energy sources in the heat of summer and the cold winter – traders can aim to capitalise on this demand by buying just before a peak in demand and selling at the peak of such demand.
Storage arbitrage considers the physical aspect of commodities by storing energy during low price periods and selling when prices rise. It is best suited to specific markets where seasonal swings are more defined. Hedging is another popular strategy used to manage risk by using future contracts, swaps or options to lock in prices or secure margins to protect against price fluctuations. It differs from derivatives energy trading which speculates on prices, instead focusing on locking down prices.
Regardless of your chosen trading strategy, it’s essential to incorporate tailored risk management to protect against volatility and potential losses. This might be choosing to start with zero leverage and work your way up slowing, implementing stop-loss orders on your trades, or focusing on diversification within your portfolio.
FAQs – Energy Trading for Beginners
What is energy trading in simple terms?
Energy trading involves the buying and selling of energy commodities such as oil, gas and renewables. Both wholesale and retail energy markets are thriving, and there are many opportunities for traders including those who wish to access the market using energy derivatives such as contract, futures and swaps.
Market dynamics and the energy trading ecosystem are driven by the principles of supply and demand, which have a direct impact on pricing and trading opportunities. To trade within the energy markets is to trade within a constantly evolving landscape where activity and pricing are influenced by more predictable factors such as changing seasonal demands, as well as developing influences such as the shift to renewables on both an individual and corporate level.
Is energy trading profitable?
Energy trading has the potential to be profitable but it also comes with a high level of risk, especially as the energy markets themselves are based upon highly complex and sometimes unpredictable fundamentals.
Some traders choose to aim for profitability using a speculative approach, informed by analysis of market trends and market fundamentals within a geopolitical context to predict price movements in specific commodities then aim to go long or short to capitalise on price fluctuations. This is typically done using CFDs.
Traders should always utilise best practice, such as building a portfolio that incorporates a level of risk that you are willing and able to accommodate. It also means understanding - and anticipating – the highly volatile nature of the energy markets that inevitably include high price swings – such swings can potentially bring highly positive outcomes as long as trades are timed correctly.
The best brokerages will also offer high-quality, high-frequency technology and software such as chart patterns, tools and trading algorithms to support individual trading goals.
How do I start energy trading online?
First, take the time to familiarise yourselves with the commodities available for trading as well as the different instruments and routes you can use to trade and invest (e.g. ETFs and CFDs). Do your research on energy brokers to find a regulated one with the best platform for your chosen style of trading, as well as additional requirements such as good-quality platform software and strong customer support.
It can also be worth looking at brokers who specialise in your preferred trading style - e.g. futures contracts or CFDs, as they will likely have specific technology and tools to effectively guide your journey.
Then, open up your account and begin your trading journey. We always recommend that beginners start with small trades or demo accounts in order to learn how to navigate the market effectively before moving on to larger trades and a potentially higher level of risk.
What qualifications do you need to be an energy trader?
There are no specific qualifications required but a commitment to learning about the markets and gaining a good trading education will prove invaluable. This will typically include developing skills in fundamental and technical analysis and quantitative modelling, as well as risk management and continued investment into learning about the major commodities and the markets in which they operate.
For those looking for a career in energy trading, there are more specific qualifications required such as Bachelor's degrees in energy management, engineering or any closely related field plus Master’s Degrees in similar fields.
The requirements will depend on the region in which you are working, with some requiring specific licensing and certifications. One common example is the Energy Risk Professional awarded by GARP (a Global Association of Risk Professionals) - a credential focused on risk in the energy markets.
Is energy trading risky?
Energy trading is by definition high risk and every trader should be aware of the potential for great losses (as well as great gains). While risk is inevitable in any volatile, fast-moving market, this can be managed effectively with an informed strategic approach considering factors such as specific trends in your chosen markets, personal risk appetite and trading ambitions.
A reputable energy trading broker will be able to support you in your trading journey, navigating effective energy trading risk management through educational tools and high-quality technology to support a custom journey. They can also support traders in building a diversified portfolio, including different types of energy trading components with varying levels of risk for a healthy balance.
The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.
All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.
Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk. Forecasts are not guarantees. Rates may change. Political risk is unpredictable. Central bank actions may vary. Platforms’ tools do not guarantee success.