Energy Trading Key Terms

Learn more about the ins and outs of the energy trading market

Like any other commodity, energy trading is the process of trading energy contracts to determine the price on the open market. Energy trading consists of a number of energy sources, including oil and natural gas. Energy trading is similar to other types of stock and commodities trading, but often includes more short-term selling for quicker profits. Energy trading is also part of the futures market, in which prices can be set months in advance.

 

Value at risk (VaR)

The value at risk technique in energy trading is a way to measure the risk of the trade based on a statistical analysis or historical price trends. Measuring the risk over a period of time helps to determine the volatility of the commodity being traded.
Try: The Risk Glossary provides an expanded definition of value at risk techniques.

Exchange-traded fund (ETF)

An exchange-traded fund is a security used to track a specific commodity index. Similar to an index or mutual fund, an ETF is traded daily like a stock and provides buyers with more options, such as selling short and not having to buy a set quantity of shares.
Try: Nasdaq provides information on ETFs in the energy trading market.

Short covering

Short covering is the process of purchasing gas contracts that will offset the short positions currently held. This is evident in the market when there is a high daily volume of trades.
Try: Green Faucet Expert Market Commentaries provides information on short covering in energy trading and how this can drastically affect natural gas and oil prices throughout the year.

Expiration

Expiration in energy trading happens when a contract on the New York Mercantile Exchange ceases trading.
Try: The NYMEX expiration procedure and daily schedule are provided by the CME Group.

Futures market

The futures market is a trading market that helps determine the prices of energy contracts for the delivery of a specific amount of energy commodities at some point in the future.
Try: Investopedia explains the basics of the futures market and futures investing.

New York Mercantile Exchange (NYMEX)

The New York Mercantile Exchange is a commodity futures exchange that has been the top trading exchange for energy commodities for more than 100 years. The NYMEX is also a commodities exchange for metals such as gold, silver, copper and aluminum.
Try: The New York Mercantile Exchange website includes news, market data, education for traders and real-time prices during trading hours.

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