Energy trading: what is it and how can you trade or invest?

What is energy trading?

Energy trading is the buying and selling of energy commodities such as oil, natural gas, electricity and carbon emissions. It involves taking a position or investing in price fluctuations in the various energy markets.

Energy sector overview

The energy market is huge – it covers a number of products, including fossil fuels like oil and gas, and renewable energy sources like solar and wind. You can measure the size of the energy market in different ways.

Global energy demand is expected to reach about 660 quadrillion BTU (British thermal units) in 2050 – that's up ~15% from 2021 levels, according to Exxon Mobil.¹ Future demand growth is forecasted to come from developing countries.

Oil is currently the largest source of the world's energy supply. Global demand for oil is around 100 million barrels a year, according to the International Energy Agency. At the current price of around $75, the USD value is around $7.5 billion per year.² Natural gas and coal are the two other key sources of global energy supply, but coal is forecasted to decline in importance over the next few decades due to its contribution to high carbon emissions.

Given these factors, renewable energy sources will become increasingly important.

How does energy trading work?

There is a wide range of energy commodities available to trade directly on our platform. The most popular traded energy markets are US crude, natural gas and Brent crude. You can also trade carbon emissions, London gas oil, gasoline, heating oil and UK natural gas.

It's possible to trade US crude and Brent crude, the most liquid energy commodities, nearly 24 hours a day, five days a week on our platform.

As an energy trader, you'd try to anticipate an energy commodity's price moves. You'd carry out research using technical and fundamental analysis to understand the key factors that influence the supply and demand of the commodity before placing your trades.

You might look to capitalise on short-term price volatility or try to identify longer-term trends. Energy markets can be volatile, so whichever trading strategy you use, you need to manage your risk carefully.

Public markets don't exist to trade renewable energies – like wind and solar power – directly. However, you can trade and invest in shares of companies that make money in these areas, as well as in the ETFs that track these themes.

Energy commodities

Spot prices, futures and options are three ways to trade energy commodities. You can use a spread betting or contract for difference (CFD) trading account to trade all of these.

When trading using spread bets or CFDs, you don't take ownership of the asset but rather take a position on the direction of the underlying asset's price. Spread bets and CFDs involve trading using leveraged derivatives, meaning you'll open a position with a deposit, but losses and profits will be calculated on the full value of the position. Profits and losses can be far larger than the initial amount paid to open the trade. Spread betting accounts are tax-free, meaning they have no stamp duty and capital gains tax payable on profits earned.*

Energy ETFs

Exchange traded funds (ETFs) give investors exposure to a wide range of markets and assets by tracking the movements of an underlying index, commodity or basket of stocks. ETFs buy the constituent stocks of the index, or they may use derivatives to track the performance of the underlying asset. ETFs allow investors to allocate capital to a theme or index in a low-cost way.

Well-known energy ETFs include the Energy Select Sector SPDR Fund, which tracks the Energy Select Sector Index. This ETF holds large-cap US energy stocks. The Invesco Energy S&P US Select Sector UCITS ETF is suitable for ISAs, and it holds large-cap US energy stocks. Similarly, the iShares STOXX Europe 600 Oil & Gas UCITS ETF tracks the performance of the STOXX Europe 600 Oil & Gas Index and is suitable for ISAs.

ETFs are useful for thematic investing. For clean and renewable energy exposure, you can buy ETFs that invest solely in solar, wind and clean energy. For example, the Invesco Solar ETF tracks the MAC Global Solar Energy Index, which invests in companies involved in the solar energy industry. For exposure to wind energy stocks, you can invest in the First Trust Global Wind Energy ETF. The First Trust NASDAQ Clean Edge Green Energy ETF invests in companies that track the performance of clean energy companies.

You can invest in ETFs using a share dealing account if you're investing for the long term, or you can trade ETFs using a spread betting or CFD trading account.

Energy stocks

You can invest and trade in stocks involved in the production, distribution and sale of energy commodities. Some of the largest companies in the world are involved in the exploration and production of oil. These include Exxon Mobil and Chevron in the US, as well as BP and Shell in the UK.

Renewable energy is becoming increasingly important as the world battles climate change. Companies that are involved in the production of clean energy include Enphase Energy and First Solar. Both are involved in manufacturing solar power equipment. Tesla is considered to be a clean energy company due to its energy generation and storage systems. Investors also classify companies like Albemarle and Livent – which are involved in the extraction and processing of lithium, a key component used in the manufacture of batteries – as clean energy stocks.

You can buy shares online in all of these companies on our platform.

* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

What's the best way for you to trade or invest in energy?

Trading energy commodities allows you to trade the underlying price of the different energy commodities directly. US crude and Brent crude are available to trade nearly 24 hours a day, five days a week. You can go long and short, they are the most liquid, and you can be confident you can trade at tight spreads.

ETFs can have lower risk than direct commodity trading – that's if you invest using a share dealing account, as the amount you invest is the maximum amount you can lose. You can also trade ETFs using a spread betting and CFD trading account. ETFs provide investors with exposure to renewable energy sectors like solar and wind, which isn't possible with direct commodity trading. You can also get exposure to the underlying oil price directly with the Coba ETC 2x Brent Oil Daily Long, but as it's less liquid than direct commodity trading, there seems limited reason to do so.

Energy shares offer investors certain advantages and disadvantages. Many of the larger oil companies pay high dividend yields to their shareholders, which can be attractive for dividend-seeking investors. Company share prices can move in line with the operating performance of that individual company, which can make them riskier investments. Valuations in some clean energy stocks are high due to lofty growth expectations. This increases risks for shareholders if the company fails to meet those expectations.

Remember, trading with spread bets or CFDs comes with added risk attached to leverage. Your position will be opened at a percentage of the value of the underlying market – but you can gain or lose money much faster than you might expect. When share dealing, you buy and own the shares, so you aren't exposed to this risk. You should also keep in mind that past performance isn't necessarily an indicator of future returns.

How to invest or trade in energy

How to invest in energy

1. Do your research and learn about shares and equities
2. Create a share dealing account to invest in shares
3. Choose whether you'd like to open a Smart Portfolio or a share dealing account with us
4. Once your account is open, you can deposit funds into the account
5. Pick your stock or ETF and how much you'd like to invest
6. Place your order

Learn more about differences between trading and investing.

When you invest in shares, you're taking direct ownership in the company. This is suitable for long-term investing because you expect that the shares will increase in value over time. Learn how to buy shares with us. You can also invest in shares and ETFs.

You can invest in our low-cost Smart Portfolios, which are managed by experts. Your investments are spread across shares, bonds and commodities to suit your needs and risk profile. If you'd like to invest for the long term but want to take a less active approach in the decision-making process, you can open a Smart Portfolio with us.

Once your share dealing account or Smart Portfolio account is open, you can then open a tax-efficient Individual Savings Account (ISA).

How to trade in energy

1. Do your research about the different energy markets
2. Decide whether you prefer to trade the market using a spread betting or CFD trading account
3. Open a live trading account or practise with a free demo account
4. Choose your market and take your position
5. Place your trade and monitor your position

Research your market

You can choose from a large number of commodities to trade on via our award-winning platform.*

Learn about the differences between spread betting and CFD trading.

Trading via spread bets and CFDs

Spread betting has certain advantages. You can choose a determined amount per point movement using spread bets. This gives you more control over your position size and currency exposure. Spread bets are popular with traders because any profits made are tax-free, and there's no stamp duty or capital gains tax payable.** All spread bets are leveraged.

A CFD is a leveraged product similar to a spread bet. You don't own the underlying asset, but you're betting on its price movement. Your currency exposure and initial margin will vary according to the contract of the asset chosen.

Your wins or losses will depend on the outcome of your prediction. CFDs are popular with traders because you can offset losses on CFDs against profits for capital gains tax purposes.** Therefore, traders often use CFDs to hedge their positions.

Remember, trading with leverage means that your potential profits or losses are magnified to the full value of the position – not just the deposit you originally paid. You can gain – or lose – money much faster than you might expect. Your losses could even exceed your initial deposit.

* Best platform for the active trader, best multi-platform provider and best trading app as awarded at the ADVFN International Financial Awards 2024. Best share dealing platform as awarded at the YourMoney.co.uk Investment Finance Awards 2024.

** Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.

What moves the price of energy assets?

The price of energy assets can be influenced by a number of factors. Supply, demand, macroeconomic and geopolitical factors are some of the key determinants of the price of energy assets.

During the Covid-19 pandemic, the demand for oil and energy assets fell as the global economy slowed and the oil price dropped sharply. As the global economy reopened and the Russia-Ukraine War began, there was a steep decline in the supply of gas from Russia. This led to increased demand for alternative energy supplies, and the price of oil increased acutely.

Interest rates can also impact the demand for oil. Higher interest rates can slow economic growth and lead to a decrease in demand for oil, along with a lower price. Conversely, lower interest rates can see expectations for higher growth, an increase in demand for oil and a higher price.

Energy shares are similarly impacted by macroeconomic and geopolitical factors, but share prices are also affected by earnings reports. Further, changes in market sentiment can have a large impact on the prices of less liquid assets like shares. In general, larger assets like energy commodities are more liquid and less volatile.

The prices of ETFs are also influenced by the above factors. However, as ETFs are usually comprised of a basket of stocks, they're less volatile than individual company shares.

Energy trading summed-up

• Energy trading involves the buying and selling of energy commodities such as oil and natural gas
• US crude, natural gas and Brent crude are the most directly traded energy commodities
• Spread bets and CFDs are the best way to trade energy commodities
• Factors such as supply and demand, as well as macroeconomics and geopolitics, can influence energy market price movements

¹ Energy Demand – Exxon Mobil
² International Energy Agency – Oil Market Report