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.
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.
No new major discovery of an oil well has been made in the past two decades. This means that the supply of oil is dwindling while the global demand for oil is on the rise. Now you need to understand the Peak Oil Concept. Peak oil is the concept that the world oil production has peaked and the production of oil will never be as high again. Oil prices and the interest rates generally move in the same direction when viewed over long periods of time.
Many oil wells have gone dry. US was a major producer of oil in the beginning of the 20th century but over time, depleted all its oil reservoirs. The last oil well went dry in Texas in the early part of'70s. 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. Some people consider the Peak Oil idea as controversial but this concept is increasingly plausible given the state of the global oil industry. The peak oil concept is very important for you to know. This means that now in the next few decades, we will be witnessing an uptrend in the oil prices as the global demand increases and the supply is unable to catch up with the global demand of oil. When oil prices reach above $100 per barrel, it becomes too expensive for the industry as well as the private consumer. With this price level, chances are that more and more investment will go into the alternative energy industry. Now you should keep these facts in the background of your mind as a trader. 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.
1) The world runs on oil and any threat to the supply of oil often leads to rising prices. 2) Demand fluctuates but supply of oil is finite. 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. - 23305
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.
No new major discovery of an oil well has been made in the past two decades. This means that the supply of oil is dwindling while the global demand for oil is on the rise. Now you need to understand the Peak Oil Concept. Peak oil is the concept that the world oil production has peaked and the production of oil will never be as high again. Oil prices and the interest rates generally move in the same direction when viewed over long periods of time.
Many oil wells have gone dry. US was a major producer of oil in the beginning of the 20th century but over time, depleted all its oil reservoirs. The last oil well went dry in Texas in the early part of'70s. 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. Some people consider the Peak Oil idea as controversial but this concept is increasingly plausible given the state of the global oil industry. The peak oil concept is very important for you to know. This means that now in the next few decades, we will be witnessing an uptrend in the oil prices as the global demand increases and the supply is unable to catch up with the global demand of oil. When oil prices reach above $100 per barrel, it becomes too expensive for the industry as well as the private consumer. With this price level, chances are that more and more investment will go into the alternative energy industry. Now you should keep these facts in the background of your mind as a trader. 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.
1) The world runs on oil and any threat to the supply of oil often leads to rising prices. 2) Demand fluctuates but supply of oil is finite. 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. - 23305
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. Trade Dow Futures . Learn Commodity Trading !
posted by Mr. Forex at
2:17 AM
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