Energy prices can be extremely volatile, due to the fact that energy is possibly the most tactical and political product in the world. The price of energy affects not only industries, but nations, as well. In this article, we will explore how the energy market influences almost everything that we do.
An energy futures contract is a legally binding agreement for delivery of crude, unleaded gas, heating oil or natural gas in the future at an agreed upon price. The contracts are standardized by the New York Mercantile Exchange (NYMEX), as to quantity, quality, time and place of delivery. Only the price is variable.
Because they trade at a centralized exchange, futures contracts offer more financial leverage, flexibility and financial integrity than trading the commodities themselves.
Futures contracts offer speculators a higher risk/return investment vehicle because of the amount of leverage involved with commodities. Energy contracts in particular are highly leveraged products. For example, one futures contract for crude oil controls 1,000 barrels of crude. The dollar value of this contract is 1,000-times the market price for one barrel of crude. If the market is trading at $60/barrel, the value of the contract is $60,000 ($60 x 1,000 barrels = $60,000). Based on exchange margin rules, the margin required to control one contract is only $4,050. So, for $4,050, one can control $60,000 worth of crude. This gives investors the ability to leverage $1 to control roughly $15.
Energies are traded at a few different exchanges around the world, for example, in London and now at the Intercontinental Exchange (ICE). Here, we will only look at the contracts traded at the New York Mercantile Exchange (NYMEX).
Gasoline is the single largest refined product in the U.S. and accounts for half of the national consumption of oil. Besides the large demand for gas, there are numerous of other factors, like government laws, which can affect the price. Reformulated gasoline blendstock for oxygen blending (RBOB) is a newer blend of gas which allows for 10% fuel ethanol.
Gas is traded in the same 42,000-gallon (1,000 barrels) contract size as heating oil. It is also traded in dollar and cents, so if the market is trading at $2/gallon, the contract will have a value of $84,000 ($2 x 42,000 = $84,000). Like the rest of the energies, this is a high dollar value contract and is quite leveraged. The daily limits here equate to a move of $10,500 per contract or 25 cents/gallon.
The minimum tick size is $0.0001, or a total of $4.20 for each contract. So any 10-cent move in unleaded gas will equate to either a gain or a loss of $4,200.
Gas is deliverable all year-round; it has position limits and the delivery point usually takes place at the future seller's facility.