Energy Futures (Part I)
Again crude oil prices have started rising. The recent price of crude oil was quoted as $ 80 per barrel. It is being predicted that the price will soon reach the $ 100 per barrel mark. One thing should be clear to you. Energy markets will be a major focal point in the global financial makers and the global economy for many years to come. The key to understanding energy trading is to understand oil, natural gas, gasoline and heating oil futures.
You must be thinking that crude oil trading is being done only between different countries or hedge funds or highly wealthy individuals. For your information, crude oil contracts can also be traded by retail traders like you and me. NYMEX trades futures and options contracts for crude oil, natural gas, heating oil, gasoline, coal, electricity and propane. NYMEX is also home to trading in metals. Trading in energy futures is centralized at the New York Mercantile Exchange (NYMEX), the world's largest physical commodity futures exchange.
Next to interest rates, energy and especially oil is the center of the universe not only for the industry but also for the financial markets. The relationship between energy and interest rates is very important to understand. This relationship ties together the two most important aspects of the global economy: energy (the fuel for growth) and the interest rates (the catalyst that powers borrowed money to do things).
One of the most important variables for any economy is the interest rates. Very high interest rates can make the economy come to a screeching halt as most businesses won't be able to afford high interest rate loans. On the other extreme, very low interest rates can make inflation too high in the economy. Now there is a relationship between the oil prices and the interest rates. The relationship between energy and interest rates is very important to understand. This relationship ties together the two most important aspects of the global economy: energy (the fuel for growth) and the interest rates (the catalyst that powers borrowed money to do things). Next to interest rates, energy and especially oil is the center of the universe not only for the industry but also for the financial markets.
High oil prices are considered to be inflationary and tend to slow down the economy. Low oil prices are always considered good for the economy. As a trader, you should know this fact that oil price rise often tends to slow down the economy and lower retail sales as well as consumer confidence with lower traffic on the highways. Sometimes the rise in oil prices leads to the increase in interest rates through the bond market and the actions of central banks and the other times the opposite happens. Rise in oil prices if often inflationary. Now all these effects have a time lag factor built in them. If the crude oil prices increase or jump suddenly like that in'73, it takes time for the increased oil prices to start affecting the other factors in the economy.
Some people consider the Peak Oil idea as controversial but this concept is increasingly plausible given the state of the global oil industry. Oil production in countries like Venezuela, Iran and Nigeria has peaked and is going down. Non OPEC sources of oil like North Sea and Mexico are also showing sign of declining production. There has been no major oil well discovery for the last few decades.
In any case, most of the experts now agree that in the next 10-20 years, the oil production will peak and after that it will start declining. Now you should keep these facts in the background of your mind as a trader.
Now this means that in the short run, following oil prices can be a highly profitable strategy. Your aim as a trader is to make quick profits by trading the price fluctuations in the oil market. So the important facts that you need to keep in the back of your mind while trading oil is: 1) Demand fluctuates but supply of oil is finite. 2) The world runs on oil and any threat to the supply of oil often leads to rising prices. As an oil trader your primary goal is to consider the effects of events on the supply of oil and correlate this effect with your charts. - 23229
You must be thinking that crude oil trading is being done only between different countries or hedge funds or highly wealthy individuals. For your information, crude oil contracts can also be traded by retail traders like you and me. NYMEX trades futures and options contracts for crude oil, natural gas, heating oil, gasoline, coal, electricity and propane. NYMEX is also home to trading in metals. Trading in energy futures is centralized at the New York Mercantile Exchange (NYMEX), the world's largest physical commodity futures exchange.
Next to interest rates, energy and especially oil is the center of the universe not only for the industry but also for the financial markets. The relationship between energy and interest rates is very important to understand. This relationship ties together the two most important aspects of the global economy: energy (the fuel for growth) and the interest rates (the catalyst that powers borrowed money to do things).
One of the most important variables for any economy is the interest rates. Very high interest rates can make the economy come to a screeching halt as most businesses won't be able to afford high interest rate loans. On the other extreme, very low interest rates can make inflation too high in the economy. Now there is a relationship between the oil prices and the interest rates. The relationship between energy and interest rates is very important to understand. This relationship ties together the two most important aspects of the global economy: energy (the fuel for growth) and the interest rates (the catalyst that powers borrowed money to do things). Next to interest rates, energy and especially oil is the center of the universe not only for the industry but also for the financial markets.
High oil prices are considered to be inflationary and tend to slow down the economy. Low oil prices are always considered good for the economy. As a trader, you should know this fact that oil price rise often tends to slow down the economy and lower retail sales as well as consumer confidence with lower traffic on the highways. Sometimes the rise in oil prices leads to the increase in interest rates through the bond market and the actions of central banks and the other times the opposite happens. Rise in oil prices if often inflationary. Now all these effects have a time lag factor built in them. If the crude oil prices increase or jump suddenly like that in'73, it takes time for the increased oil prices to start affecting the other factors in the economy.
Some people consider the Peak Oil idea as controversial but this concept is increasingly plausible given the state of the global oil industry. Oil production in countries like Venezuela, Iran and Nigeria has peaked and is going down. Non OPEC sources of oil like North Sea and Mexico are also showing sign of declining production. There has been no major oil well discovery for the last few decades.
In any case, most of the experts now agree that in the next 10-20 years, the oil production will peak and after that it will start declining. Now you should keep these facts in the background of your mind as a trader.
Now this means that in the short run, following oil prices can be a highly profitable strategy. Your aim as a trader is to make quick profits by trading the price fluctuations in the oil market. So the important facts that you need to keep in the back of your mind while trading oil is: 1) Demand fluctuates but supply of oil is finite. 2) The world runs on oil and any threat to the supply of oil often leads to rising prices. As an oil trader your primary goal is to consider the effects of events on the supply of oil and correlate this effect with your charts. - 23229
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. Trade Dow Futures . Learn Commodity Trading !
posted by X - Men @ 9:07 AM
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