The energy markets

  • Sep 13 2022
  • by
  • Analyst AZA
The energy markets

The energy markets

Energy markets have taken a center stage in the financial markets and will continue to remain in focus in the coming years and decades. The world is transitioning from a non-renewable energy source such as Brent crude, natural gas and coal, and moving to renewable energy sources such as solar and wind energy. Climate change has fast-tracked the need for a transition to renewable energy sources. The coming years will be fascinating for traders in the energy sector. This article will be giving a view into the energy sector and how traders can capitalize on it. It does not take an oil analyst to successfully assess the state of the energy sector, any person who drives a motor car or pays energy bills should be familiar with what is taking place in the energy sector. Depreciating supply and appreciating demand are pushing energy prices higher.

Surveys estimate that more than 85% of crude has already been discovered and eventually, the usage of oil will peak because oil is non-renewable. Oil exploration companies are discovering oil reserves at a much slower rate than countries are consuming them. major concerns are suppliers that are politically sensitive such as Nigeria and Venezuela. In these countries, the output can be curtailed overnight. Current consumption levels suggest that the world's oil supply will approximately last until 2050 if nothing is done about the matter. It's worth noting that this will impact the energy sector sooner than 2050, however. In earlier decades oil exploration companies used to generate a lot of revenue from discovering oil reserves and operating marketing at breakeven. This method used to work very well before the 1970s, however, these companies realized that profitability from exploration was no longer guaranteed. Therefore, marketers of petroleum had to pay close attention to changes in the demand and supply as well.

The link between price changes and the supply and demand of oil is close, which means they are price elastic. when prices go up, consumption depreciates, while production becomes more cost-effective and supply appreciates. Likewise, when prices are going down, consumption increases and production slows down. With oil, however, the response of consumption is lagging behind price movements. For example, higher oil prices have decreased the demand for sport utility vehicles, but it will take a significant amount of time for factories to retool for the production of more energy-efficient models. The decreasing capacity of oil reserves around the world has put more pressure on companies to seek alternative energy sources, but the world's dependence on oil is so much that it will take require a significant amount of time to execute the transition.

As the oil reserves are declining, petroleum products will fluctuate in response to the fundamentals in the energy sector. This will represent traders with a lot of trading opportunities. Novice traders should keep in mind that an increase in volatility is directly proportional to higher risk. During the last three decades, oil consumption has increased by more than 33 million barrels, half of this increase can be linked to Asian demand and rapidly growing economies. The oil market is a two-tier market, it consists of a spot market and a futures market. Natural gas can be considered an alternative source of energy to oil. Natural gas has long been prized for its ability to burn cleanly and its usage is expected to continue to grow due to its advantageous properties. The demand for natural gas tends to increase during winter seasons, however, its usage during summer seasons has been steadily increasing, thereby, moderating the cyclical nature of natural gas.

When the economy is at an expansion phase, the level of production goes up, resulting in increases in raw material prices, and energy. Since the war between Ukraine and Russia began, oil and natural gas prices have risen substantially. Gasoline is a combination of hydrocarbons and one of the most used sources of energy. 50% of all the Brent crude produced is converted into gasoline in a three-stage process that separates crude into chemical components. The gasoline market is very large and diversified, and consumers are offered three grades of gasoline. The difference between the grades is the octane level, which measures the ability to resist engine knocking. This makes the gasoline market to be very volatile and highly competitive. Fast-growing countries, contribute to the growing worldwide gasoline consumption.

In recent decades, refineries have been introducing efficient technologies which give them the ability to produce more gasoline from crude. Russia has cut the gas supply via the Nord Stream-1 pipeline, intensifying the economic conflict between Moscow and Brussels, and increasing the possibility of a recession and energy rationing in some of the richest countries. The European Union is on track to meet targets for filling gas storage, but analysts are warning that the bigger factor for energy security will be where the European nations will be able to reduce consumption enough to ensure that the fuel, they have at disposal will last them through the winter season. The European Union reacted by putting price caps on Russian oil prices. The leader of Saudi Arabia, one of the largest oil producers, stated that oil production will be cut. This does not mean the oil reserves are not enough but it reflects the high demand for crude oil.

High levels of production at lower prices will exacerbate the oil demand, which will have an opposing impact on what the monetary bodies across the globe are trying to achieve. Higher oil prices can be regarded as another form of global tightening because companies will face cost pressures and will pass the higher prices to consumers. This will decrease consumption and reduce inflation. Therefore, oil prices can be used as a tool to reduce consumer demand. Global oil exploration companies are investing billions of dollars into offshore drilling. Increasing oil prices are encouraging investment along with the mounting energy demand from Europe. In recent days, oil prices have been depreciating. Although, this is unlikely to be the case for an extended amount of time, because the suppliers won't be able to meet the demand that will be created by subdued oil prices. These price declines should serve as a relief to economies around the globe. Since oil was one of the main reasons that led to many countries experiencing high levels of inflation, its decline should mean something.

In earlier decades oil exploration companies used to generate a lot of revenue from discovering oil reserves and operating marketing at breakeven.


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