Energy Investing: Commodities - dummies

Energy Investing: Commodities

By Nick Hodge, Jeff Siegel, Christian DeHaemer, Keith Kohl

Commodities are the raw materials that form the foundation of the energy market. The three classes of commodities are agricultural, energy, and metals. The bulk of these trades are made by consumers and producers of the commodity to manage price risk.

A utility that burns natural gas can use the commodities market to hedge against a future rise in price. Conversely, a company that produces natural gas can use the commodity market to hedge against declines in price.

You’re not a consumer or producer, so you’d simply be trading contracts to profit from price swings, selling the contract before having to take delivery of the natural gas.

Exchanges administer commodities trading in futures markets. Through your futures commission merchant or introducing broker, you can buy contracts for a specific quantity at the determined price to be delivered on a future date. This table lists the exchanges on which energy commodities are traded.

Exchanges for Energy Commodities
Exchange Name Commodities Traded
Chicago Board of Trade (CBOT) Ethanol
Intercontinental Exchange (ICE) Crude oil, electricity, natural gas
Kansas City Board of Trade (KCBT) Natural gas
New York Board of Trade (NYBOT) Ethanol
New York Mercantile Exchange (NYMEX) Crude oil, electricity, gasoline, heating oil, natural gas,

The CBOT, KCBT, and NYMEX are all part of the Chicago Mercantile Exchange (CME) Group, which also owns 90 percent of the Dow Jones indexes, including the Dow Jones Industrial Average. The Intercontinental Exchange owns the New York Stock Exchange.

Trading futures is inherently complex because it involves contracts, various units of measurement, hedging, and leverage. Because of this, you can lose more than just the original capital you use to invest. If you don’t fully understand the nature of futures contracts or aren’t comfortable delegating control of your account to a professional, it’s best to invest in energy using other methods.