The energy market is a commodity market that operates specifically to faciliate the trade and supply of energy. Often referred to as the electricity market, the energy market trades in the primary economic sector (rather than manufactured products). That is, energy commodities that are mined or captured directly from natural resources (termed primary) such as crude oil, natural gas, kerosene, propane, coal, diesel, ethanol, etc. Crude oil and natural gas are the two are the most commonly traded energy assets. Wholesale energy commodities are physically traded and/or traded in derivative markets including spot, forward, futures and/or options markets. Wholesale energy market traders are generators, suppliers and/or financial intermediaries. The retail market is where energy is supplied and sold to the end user.show more
Energy prices are typically volatile. Due to storage limitations of energy supplies, supply and demand must be carefully managed. On the demand side – referred to as the ‘load’ or volume – weather, economic activity, availability of competing fuels and consumption affect the price equilibrium. On the supply side – referred to as ‘generation’ – fuel prices, energy availability and production drive energy prices.
Energy market participants are typically hedgers, speculators or arbitragers. Hedgers buy and sell to protect themselves from price volatility by fixing the energy price for delivery at a later date. Speculators – as in any market – buy and sell in an attempt to forecast future price movement in the hope of realising a profit. Arbitragers attempt to take advantage of market inefficiencies.
For traders, a firm understanding of the outlook for the global energy market is required.
By 2040, world population is expected to reach 9.1 billion, up from 7.3 billion today. Total world consumption of energy is anticipated to expand from 549 quadrillion British thermal units (Btu) in 2012 to 629 quadrillion Btu in 2020 and then upward to 815 quadrillion Btu in 2040—that is a 48-percent increase from 2012 to 2040. This means the constitution of the energy market as well as supply and demand will alter to facilitate changing demographic, macro and micro economic and industrial development.
By 2040, demand for energy supplies will increase with oil and natural gas likely accounting for 60-percent of global supplies in 2040. Oil is anticipated to remain the world’s primary energy source while natural gas will lead as the largest growing fuel source. Nuclear energy and renewables will grow about 50-percent and be approaching a 25-percent market share of the world’s energy supply mix.
By 2040, the developing world will account for 65 percent of the world’s energy consumption. Key energy consumer China – who has led global energy demand for the last 15 years fuelled by huge economic development – will remain the number one energy consumer up until 2040. India’s energy demand is expected to grow by more than any other country in the period up to 2040, driven by an economy that grows to more than five-times its current size and by population growth – making it the world’s most populous country (1.6 billion). Indian energy consumption more than doubles to 2040, accounting for 25% of the rise in global energy use to 2040, and the largest absolute growth in both coal and oil consumption.
Crude oil is the most widely used energy material in the world and globally is the largest traded commodity. A type of fossil fuel, crude oil is a naturally occurring, unrefined petroleum product. Refined to produce usable products such as gasoline, heating oil, diesel, jet fuel and various forms of petrochemicals, crude oil is a non-renewable resource.
Obtained through drilling, crude oil often called ‘black gold’ (because of its colour, scarcity and value) – when crude oil is refined (or processed), it takes approx. 3 barrels of oil to produce 2 barrels of unleaded gas and 1 barrel of heating oil.
Global consumption of crude oil is estimated at 95 million barrels per day (BPD). The US (19.6-million BPD) is the leading crude oil consumer followed by China (11.3-million BPD), Japan, India and Russia.
Because there are more than 200 varieties of crude oil, there are three primary benchmarks (or marker crude) that serves as a reference price for traders of crude oil which represent crude oil from a particular part of the world. They are Brent Blend (the reference for about two-thirds of the oil traded around the world), West Texas Intermediate (WTI) and Dubai Crude. And as one of the most actively traded commodities in the world, crude oil prices are sensitive to changes in global economic and political climates. Reaching an all-time high of $145.31 in July of 2008 and a record low of $1.17 in February of 1946, crude oil is currently priced at approx. $52.78 (September 2017). Crude oil is predominately traded in the spot and futures market.
Natural gas is a non-renewable fossil fuel used as a source of energy for heating, cooking, and electricity generation.
Informally referred to simply as ‘gas’ (especially when compared to other energy sources such as oil or coal), natural gas supplies approx. 22% of the energy used worldwide, and makes up nearly a quarter of electricity generation.
Because of its low density, it is not easy to store natural gas or to transport it by vehicle and, before it can be used as a fuel – natural gas must be processed to remove impurities, including water, to meet the specifications of a tradeable natural gas. The by-products of this processing include: ethane, propane, butanes, pentanes, etc.
Measured in normal cubic meters (cu m) or cubic feet (Tcf), approx. 80-percent of the world’s total proven natural gas reserves are in ten countries including Iran, Russia, Qatar, Turkmenistan and the United States. The Middle East holds the largest proved reserves by region, Russia is the largest reserve holder by country. As of January 1, 2016, there were an estimated 6,879 trillion cubic feet (Tcf) of total world proved reserves of gross natural gas with average consumption natural gas worldwide projected to increase from 120 trillion cubic feet (Tcf) in 2012 to 203 Tcf in 2040 (International Energy Outlook 2016).
The most heavily traded natural gas contract is the Henry Hub Natural Gas Futures (NG). Named after the gas pipeline with the same name which runs through Erath, Louisiana and traded on the New York Mercantile Exchange (NYMEX), natural gas reached an all-time high of 15.39 in December of 2005 and a record low of 1.02 in January of 1992. Current trading price is approx. $2.92 (September 2017).
Coal is a combustible black sedimentary rock made mostly of carbonized plant matter used primarily as fuel to generate heat or electricity. As the leading source for energy and accounting for almost 40-percent of the world’s electricity generation due to its availability and relative low cost, thermal coal (metallurgical coal is used for steel production) is a non-renewable fossil fuel which is also the single largest source of air pollution (carbon dioxide emissions) in the world making it a leading contributor to global warming and climate change.
Accessible and mined in over 100 countries – all continents except Antarctica – and mined from the ground, either by shaft mining or at ground level by open pit mining, world coal production totaled 6,901 million tonnes in 2015 with Australia, US, Canada and Russia leading supply countries.
Traded internationally, China, India, Japan, South Korea, Taiwan, Germany, Turkey, Russia, the United Kingdom, Malaysia, Thailand, Brazil, Italy and Spain, account for 81-percent of total coal trade. Shipped either by ship or rail, only approx. 25-percent of the world’s coal is transported internationally – most coal is consumed in the country in which it is produced – where transportation costs account for almost 25-percent of the total delivered price of coal (for international trade).
Affected by the price of other fossil fuels, coal remains the cheapest fuel source due to its economies of scale. Historically, Coal reached an all-time high price of $139.05 in January of 2011 and a record low of $48.80 in January 2016. Current price $54.25 per metric tonne (September 2017).
Carbon trading, sometimes called an Emissions Trading Scheme (ETS), is a market-based tool to caps the total level of greenhouse gas emissions and allows those industries and companies with low emissions to sell their extra government-granted allowances to larger emitters. Aimed at controlling pollution by providing economic incentives for achieving reductions in the emissions of pollutants, one emissions permit is considered equivalent to one metric ton of carbon dioxide (CO2) emissions (or its equivalent CO2e). Quoted in euros, carbon trading exchanges (CTX) have been established for spot, futures and options market transactions.