What Is Energy Trading?
What Is Energy Trading? Whenever or wherever there is a commodity, it can be traded. This goes back to the earliest days even before the advent of money when people exchanged one set of goods for another – a lamb from the herd for a bushel of corn and so on. Nowadays we think nothing about trading in bullion, in orange juice, timber, or even barrels of wine.
Trading in commodities can basically be divided into two kinds: soft and hard. Soft commodities are those that are harvested and reaped such as wheat, coffee, sugar and cocoa. By contrast hard commodities are mined such as gold or coal or of course oil.
So where in these distinctions do we place energy trading?
Energy is the key to virtually all the ways in which we live our lives – just remember how impotent you felt when you were last subject to a power cut, outage or whatever quaint terms are used to describe one in your neck of the woods. Energy is vital to our lives and is (in its different aspects) in very great demand, the demand frequently exceeding the supply.
In trading and marketing terms, we are talking about the buying, selling and moving of bulk energy (electricity and natural gas) from where it is produced to where it is needed. The wholesale commodity market in these energy sources can be subject to the mot enormous swings which means that the price of energy is highly volatile in nature.
Although in many countries governments have been known to intervene in the energy market in order to try and maintain an agreed and agreeable price level, basically these prices are determined by market forces and the laws of supply and demand. If we take North America as an example, the cost of energy usually goes up in the cold winter months when temperatures are low and there is a high demand for central heating. Conversely in warmer climactic zones the peak of demand comes in the summer when everyone turns on his air conditioning in order to get relief from heat and humidity.
Energy Trading Basics
Now it is quite obvious that there is a very basic distinction between energy trading and that of any other commodity. The important difference as far as electricity is concerned is that as electricity is produced, it is consumed. It doesn’t lend itself to storage! If supply and demand are not balanced, everyone is in trouble. It is a good deal harder to be a successful energy trader than in other commodities.
Whilst traders are being encouraged to join in the marketing of electricity, those who consider participating are required to have a great deal of financial liquidity as well as a high level of technical knowledge. The energy trading market is no place for the beginner or the inexperienced or uncertain trader.
Nonetheless a skilled trader will have had an understanding of the forces, mostly climactic, which affect the pricing of energy and many people who master these skills have made major gains in the market.