Energy prices can be extremely volatile, due to the fact that energy is possibly the most tactical and political product in the world.

The price of energy affects not only industries , but nations, as well. In this article, we will explore how the energy market influences almost everything that we do. What Are Energy Futures Contracts? An energy futures contract is a legally binding agreement for delivery of crude, unleaded gas, heating oil or natural gas in the future at an agreed upon price. The contracts are standardized by the New York Mercantile Exchange NYMEX , as to quantity, quality, time and place of delivery.

Only the price is variable. To read about the basics of futures, see Options Basics Tutorial and Futures Fundamentals. Advantages of Futures Contracts Because they trade at a centralized exchange , futures contracts offer more financial leverage , flexibility and financial integrity than trading the commodities themselves. To keep reading about this subject, see Who sets the price of commodities?

The Portfolio Hedge and Commodity Prices And Currency Movements. Energy contracts in particular are highly leveraged products. For example, one futures contract for crude oil controls 1, barrels of crude. The dollar value of this contract is 1,times the market price for one barrel of crude.

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Find out more about leveraging in What is the difference between leverage and margin? Contract Specifications Energies are traded at a few different exchanges around the world, for example, in London and now at the Intercontinental Exchange ICE. Here, we will only look at the contracts traded at the New York Mercantile Exchange NYMEX. Crude is the base material that makes gas, diesel, jet fuels and thousands of other petrochemicals. More specifically, the type of crude in question is the light sweet crude oil variety, which, according to NYMEX, contains lower levels of sulfur.

This type of crude is traded in dollars and cents per barrel, and each future contract involves 1, barrels. Movement The minimum price movement, or tick size , is a penny. Although the market frequently will trade in sizes greater than a penny, one penny is the smallest amount it can move. This means crude will never have an upper or lower lock limit.

Delivery The requirements of the exchange specify delivery to numerous areas on the coast and inland. These areas are subject to change by the exchange. For example, currently for the NYMEX, the delivery point is in Cushing, Oklahoma. Because energy is in such demand, is it deliverable all 12 months of the year. To maintain an orderly market, the exchanges will set position limits.

A position limit is the maximum number of contracts a single participant can hold. There are different position limits for hedgers and speculators. Heating oil futures are used by a wide variety of businesses to hedge their exposure to energy cost.

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Heating oil is traded in dollars and cents per gallon. One contract of heating oil controls 42, gallons, or one rail car. Delivery Heating oil contracts are deliverable for 18 consecutive months, and the delivery point is at New YorkHarbor. Heating oil, like crude, also has position limits set by the exchanges, which are no more than 7, contracts in total, and no more than 1, contracts during the last three days of the current month. Unleaded Gas RBOB Gasoline is the single largest refined product in the U.

Besides the large demand for gas, there are numerous of other factors, like government laws, which can affect the price. Gas is traded in the same 42,gallon 1, barrels contract size as heating oil. Like the rest of the energies, this is a high dollar value contract and is quite leveraged. Delivery Gas is deliverable all year-round; it has position limits and the delivery point usually takes place at the future seller's facility.

Natural Gas According to the U. Natural gas is one of the bigger futures contracts that are traded worldwide. One contract equals 10, MM Btus million British thermal units.

Delivery Like other energies, natural gas is deliverable all year round and has position limits. The delivery point for natural gas traded on the NYMEX is at the Sabine Pipe Line Company's Henry Hub, which is located in Louisiana. The energy futures market helps hedgers reduce the risk associated with adverse price movements. There are a number of hedgers in the energy markets because almost industrial sectors uses energy in some form.

The energy complex is quite volatile and takes quite a bit of capital to get involved, although there are new e-mini contracts available, which are growing in volume month by month. Conclusion It is important to note that trading in this market involves substantial risks and is not suitable for everyone - only risk capital should be used. Any investor could potentially lose more than originally invested. To read about more commodities and their specific markets, see Grow Your Finances In The Grain Markets , The Sweet Life Of Soft Markets , Water: The Ultimate Commodity , Trading Gold And Silver Futures Contracts and What Is Wrong With Gold?

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund. Latest Videos PeerStreet Offers New Way to Bet on Housing New to Buying Bitcoin? This Mistake Could Cost You Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.

Fueling Futures In The Energy Market By Hank King Share. Futures Trading What Are Energy Futures Contracts? Learn about the risks and rewards of trading oil futures contracts. Read about a few strategies to limit the risk in trading oil futures contracts. If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities. Hedge against rising energy prices and diversify your portfolio with these funds.

Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price. The forex market is not the only way for investors and traders to participate in foreign exchange.

Read detailed analyses of the top five oil and gas exchange-traded funds ETFs to consider for , and learn the characteristics of these ETFs.

Learn what differences exist between futures and options contracts and how each can be used to hedge against investment risk Fundamentally, forward and futures contracts have the same function: Learn about values of futures contracts and the initial margin a trader must place in an account to open a futures position, Learn what items futures may be purchased for, what a futures contract is and discover how the futures markets have greatly An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

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