Commodities are raw materials that are manufactured, transported or consumed by human beings in general. Commodity markets allow for trading in these commodities. This form of trading can have a significant impact on the economies of nations who are the producers of these commodities. Shortages have sparked wars, whereas oversupply has crippled economies that are dependent on the commodities for their finances.
Energy is just one of the commodities while others are metals, livestock and agricultural products. The energy basket will contain crude oil, gasoline, heating oil and natural gas. It can always help trading if you have some basic knowledge about the industry that you are trading in. In a commodity market, commodities can be bought and sold for delivery immediately in the spot market, whereas in the derivatives market financial instruments are traded that are based on commodities. Commodity prices keep fluctuating daily and create a margin on a futures contract. Futures contracts can be held for months or years.
Energy commodities are prone to swing in prices that may be caused by political events, the demand and supply scenario and even disasters man-made or natural, that affect the production or transport of these commodities. Energy commodity trade can be affected by problems in storage, the distribution of the commodities, border clearance problems and the means used for transportation of the product. Severe weather prevents shipments, natural disaster can halt production, and political events can have an effect on the distribution of these products. These events can affect the demand and supply of the product and thus cause fluctuations in prices.
Energy commodities trading is also cyclic, and oil and gas prices can be affected by cold weather that increases the demand for this product and leads to increase in prices. These commodities are watched closely by consumers, corporations and countries. High prices of crude can affect consumption patterns and them, in turn, can lead to price fluctuations. Oil producing companies and countries whose main source of revenue comes from this commodity find their entire economy being affected by prices.
Trading in these commodities uses standards for volumes and units that can be bought or traded. Technological changes that affect the need for a particular commodity can also cause prices to change. Energy commodity trading can become a risky proposition because the prices are often affected by factors that are not possible to predict. Cyclic patterns that depend on weather are more predictable even though not with complete accuracy.
Futures, hedging and forward contracts are largely used for trading in energy commodities. Companies that are largely dependent on these commodities for their operations engage in hedging or purchasing products at fixed prices so that their operations are not affected by price fluctuations. They assume the risk of losing when prices are lower but save money when they go up.
Investing in commodities can be compared to speculation or gambling if the trader does not take decisions based on proper information. Correctly predicting trends and anticipating changes can make such trading profitable.