For many investors, the word “trading” is a scary one. It conjures up images of somebody hunched over a keyboard for hours on end, with a huge bank of screens displaying massive amounts of data and charts. They simply can’t or at least don’t want to put themselves in that situation. That is understandable, but the nature of the energy markets makes it essential that even those whose attention is more fleeting understand and utilize at least some basic trading concepts.
The reason for that can be summed up in one word…volatility. It is important to understand here that while that word is often used to imply big drops in price it really means rapid, somewhat unpredictable movement both up and down, and virtually all major energy markets and stocks have shown plenty of that in the last year or so. Even large, integrated oil companies such as BP (BP: Chart below) have had a year of ups and downs.
(Click to enlarge)
That is easily explained. Everything energy related responds to some extent to fluctuations in the price of oil and natural gas, and those markets are themselves volatile. Consistent, one directional moves in commodity prices are rare because of the nature of the market and flexibility in production. Higher prices encourage increased supply which depresses the price until supply is reduced. At that point prices begin to climb again and the cycle is repeated.
That is economics 101, but it has implications…