Energy trading: what is it and how can you trade it

What is energy trading?

Energy trading is the buying and selling of energy commodities such as oil, natural gas, electricity and carbon emissions. It involves taking a position in price fluctuations in the various energy markets.

Energy sector overview

The energy market is huge – it covers a number of products, including fossil fuels like oil and gas, and renewable energy sources like solar and wind. You can measure the size of the energy market in different ways.

Global energy demand is expected to reach about 660 quadrillion BTU (British thermal units) in 2050 – that's up ~15% from 2021 levels, according to Exxon Mobil.¹ Future demand growth is forecasted to come from developing countries.

Oil is currently the largest source of the world's energy supply. Natural gas and coal are the two other key sources of global energy supply, but coal is forecasted to decline in importance over the next few decades due to its contribution to high carbon emissions.

Given these factors, renewable energy sources will become increasingly important.

How does energy trading work?

There’s a range of energy commodities available to trade directly on our platform. The most popular traded energy markets are US crude, natural gas and Brent crude. You can also trade carbon emissions, London gas oil, gasoline, heating oil and UK natural gas.

It's possible to trade US crude and Brent crude, the most liquid energy commodities, nearly 24 hours a day, five days a week on our platform.

As an energy trader, you'd try to anticipate an energy commodity's price moves. You'd carry out research using technical and fundamental analysis to understand the key factors that influence the supply and demand of the commodity before placing your trades.

You might look to capitalise on short-term price volatility or try to identify longer-term trends. Energy markets can be volatile, so whichever trading strategy you use, you need to manage your risk carefully.

Public markets don't exist to trade renewable energies – like wind and solar power – directly. However, you can trade and invest in shares of companies that make money in these areas, as well as in the ETFs that track these themes.

Energy commodities

Spot prices, futures and options are three ways to trade energy commodities. You can use a contract for difference (CFD) trading account to trade all of these.

When trading using CFDs, you don't take ownership of the asset but rather take a position on the direction of the underlying asset's price. CFDs involve trading using leverage, meaning you'll open a position with a deposit, but potential losses and profits will be calculated on the full value of the position. So, profits and losses can be far larger than the initial amount paid to open the trade.

Energy ETFs

Exchange traded funds (ETFs) give investors exposure to a wide range of markets and assets by tracking the movements of an underlying index, commodity or basket of stocks. ETFs buy the constituent stocks of the index, or they may use derivatives to track the performance of the underlying asset. ETFs allow investors to allocate capital to a theme or index in a low-cost way.

Well-known energy ETFs include the Energy Select Sector SPDR Fund, which tracks the Energy Select Sector Index. This ETF holds large-cap US energy stocks. The iShares STOXX Europe 600 Oil & Gas UCITS ETF tracks the performance of the STOXX Europe 600 Oil & Gas Index.

ETFs are useful for thematic investing. For clean and renewable energy exposure, you can buy ETFs that invest solely in solar, wind and clean energy. For example, the Invesco Solar ETF tracks the MAC Global Solar Energy Index, which invests in companies involved in the solar energy industry. For exposure to wind energy stocks, you can invest in the First Trust Global Wind Energy ETF. The First Trust NASDAQ Clean Edge Green Energy ETF invests in companies that track the performance of clean energy companies.

You can trade ETFs using a CFD trading account with us.

Energy stocks

You can use your CFD account to trade in stocks involved in the production, distribution and sale of energy commodities. Some of the largest companies in the world are involved in the exploration and production of oil. These include Exxon Mobil and Chevron in the US, BP and Shell in the UK and Total in France.

Renewable energy is becoming increasingly important as the world battles climate change. Companies that are involved in the production of clean energy include Enphase Energy and First Solar. Both are involved in manufacturing solar power equipment. Tesla is considered to be a clean energy company due to its energy generation and storage systems. Investors also classify companies like Albemarle and Livent – which are involved in the extraction and processing of lithium, a key component used in the manufacture of batteries – as clean energy stocks.

You can trade shares using CFDs in of these companies on our platform.

What's the best way for you to trade in energy?

Trading energy commodities allows you to trade the underlying price of the different energy commodities directly. You can go long or short on US crude and Brent crude nearly 24 hours a day, five days a week. As they’re typically the most liquid, you’ll probably trade them at tight spreads.

ETFs can have lower risk than direct commodity trading. You can trade ETFs using a CFD account. ETFs provide investors with exposure to renewable energy sectors like solar and wind, which isn't possible with direct commodity trading. You can also get exposure to the underlying oil price directly with the Coba ETC 2x Brent Oil Daily Long, but it's usually less liquid than direct commodity trading.

Energy shares offer investors certain advantages and disadvantages. Many of the larger oil companies pay high dividend yields to their shareholders. CFD account holders don’t receive cash dividends, but dividend adjustments are made to CFD accounts to ensure the accounts are brought up to fair value.

Company share prices can move in line with the operating performance of that individual company, which can make them riskier investments. Valuations in some clean energy stocks are high due to lofty growth expectations. This increases risks for shareholders if the company fails to meet those expectations.

Remember, trading with CFDs comes with added complexity and risk attached to leverage. Your position will be opened at a percentage of the value of the underlying market – but you can gain or lose money much faster than you might expect. You could even lose more than your deposit, as potential profits and losses are magnified to the full value of the position. It’s also useful to keep in mind that past performance isn't necessarily an indicator of future returns.

How to trade in energy

1. Do your research about the different energy markets
2. Open a live CFD trading account or practise on a risk-free demo account
3. Select which market you want to trade using CFDs
4. Set your position size and manage your risk
5. Open and monitor your trade

You can trade CFDs on a large number of commodities via our award-winning platform.* CFDs are leveraged derivatives. This means you don't own the underlying asset, but you're betting on its price movement.

You can choose to trade CFDs on the spot market that are suitable for shorter-term trading as the spot price is the immediate real-time price of the asset.

You can also trade CFD futures, which are best for medium to longer-term trades as they allow you to speculate on the price that the underlying asset will be on a specific date. As there are no funding charges on CFD futures, they are a popular choice for those who plan to keep positions open longer than a day or two.

With CFDs, your currency exposure and initial margin will vary according to the contract of the ETF chosen. Your wins or losses will depend on the outcome of your prediction. To manage risk when trading CFDs, many traders set stop loss orders to prevent outsized losses.

Remember, trading with CFDs comes with added complexity and risk attached to leverage. Your position will be opened at a fraction of the value of the total position size, but you can gain or lose money much faster than you might expect. Your losses can exceed the initial margin that you paid because potential profits and possible losses are magnified to the full value of the trade. It's useful to keep in mind when you're trading that past performance isn't a guarantee of future patterns.

* Best platform for the active trader, best multi-platform provider and best trading app as awarded at the ADVFN International Financial Awards 2022.

What moves the price of energy assets?

The price of energy assets can be influenced by a number of factors. Supply, demand, macroeconomic and geopolitical factors are some of the key determinants of the price of energy assets.

During the Covid-19 pandemic, the demand for oil and energy assets fell as the global economy slowed and the oil price dropped sharply. As the global economy reopened and the Russia-Ukraine War began, there was a steep decline in the supply of gas from Russia. This led to increased demand for alternative energy supplies, and the price of oil increased acutely.

Interest rates can also impact the demand for oil. Higher interest rates can slow economic growth and lead to a decrease in demand for oil, along with a lower price. Conversely, lower interest rates can see expectations for higher growth, an increase in demand for oil and a higher price.

Energy shares are similarly impacted by macroeconomic and geopolitical factors, but share prices are also affected by earnings reports. Further, changes in market sentiment can have a large impact on the prices of less liquid assets like shares. In general, larger assets like energy commodities are more liquid and less volatile.

The prices of ETFs are also influenced by the above factors. However, as ETFs are usually comprised of a basket of stocks, they're less volatile than individual company shares.

Energy trading summed up

• Energy trading involves the buying and selling of energy commodities such as oil and natural gas
• US crude, natural gas and Brent crude are the most directly traded energy commodities
• CFD trading is a popular way of gaining exposure to energy commodities
• Factors such as supply and demand, as well as macroeconomics and geopolitics, can influence energy market price movements

1	Exxon Mobil, 2023