oil price trading

sebastien-bischeri

How to Trade Oil and Gas (Part 1)

August 23, 2021, 10:30 AM Sebastien Bischeri , Oil Trading Strategist

Trading Positions

Please note that due to market volatility, some of the key levels may have already been reached and scenarios played out. Risk Management: an idea here could be to enter on some potential dips (price getting back to support levels) by allocating one quarter (1/4th) of the position, then averaging down to lower supports with successively one third (1/3rd) and two fifths (2/5th) in case of further dips and depending on the volatility of each chosen security…

Investing entries (long-term; our opinion; support levels for stocks and ETF indexes): Long.

Energy Stocks

Energy ETFs

ALB, 160.57-187.95

FCG, 10-11.34

DCP, 23.02-24.44

QCLN, 53.07-61.81

ENB, 33.05-34.70

TAN, 64.48-75.13

ENPH, 114.85-143.85

SPWR, 14.99-19.75

Oil, gas, and other energy news is everywhere, but “how do I get in on the action? What type of trading instruments do I use?” Read on and find out.

You might be thinking “should I use stocks, ETFs, CFDs, or futures to trade oil and gas? What about solar energy?” Picking the right instrument depends on many factors such as types of businesses, regions, risk profiles, and psychology.

In today’s article, I’ll provide you with some ideas about the various products that you can use to trade oil and gas, but also more generally the energy markets. A thank you goes out to Mark, one of our readers, who asked this question – one that some of you may be wondering about. By the way, please feel free to send me questions. That’s what you come here for – the extra context.

First, let’s focus mainly on non-leveraged securities (stocks and ETFs), while showing some stable and/or fast-growing stocks and indexes. Major leveraged products, such as futures contracts, will be emphasised in a second part this week, so bear with me, as I provide you with some ideas as to their usefulness.

Stocks

Common shares in stocks is one of the most popular types of security and widely used by portfolio managers, whether they are hedge funds, investment funds, pension funds or retail investors.

Shares in stocks are easy to trade. Since they are non-leveraged instruments, they present some attractive characteristics to get one foot into investing such as the fact that they do not necessarily require a large amount of capital to get started. Furthermore, these days there is a growing number of brokers offering to invest into a fraction of shares, so it helps mitigate the risk and optimise a portfolio return with better diversification and more accuracy in exposure.

Here are some interesting companies that you can use to diversify your portfolio (click on link below each chart to see more information, data, holdings, etc.)::

  • ALB, a chemical manufacturing company, large provider of lithium for EV batteries;
  • DCP, a natural gas company dedicated to midstream petroleum services;
  • ENB, a multinational pipeline company, focusing on the transportation of oil and gas;
  • ENPH, a tech company providing residential/commercial solar plus storage solutions;
  • SPWR, a company specialising in solar power generation and energy storage.

Figure 1 – Albemarle Corp (ALB) stock (monthly, logarithmic scale)

Figure 2 – DCP Midstream Partners LP (DCP) stock (monthly, logarithmic scale)

Figure 3 – Enbridge Inc. (ENB) stock (monthly, logarithmic scale)

Figure 4 – Enphase Energy Inc. (ENPH) stock (weekly, logarithmic scale)

Figure 5 – SunPower Corp. (SPWR) stock (monthly, logarithmic scale)

Exchange-traded funds (ETFs)

On the ETF market, you can invest directly in a basket of stocks directly or indirectly linked to the energy sector. For example, investing in a portfolio of natural gas, oil and alternative or renewable energy companies will be seen as directly linked to the energy industry. On the other hand, investing in some other sectors such as the maritime/shipping and transportation sectors, the construction/utility sectors, or even – to another extent – the crypto/mining sector, could be seen as indirect assets (the latter having a relative impact on energy demand and supply.)

The following are some ETFs worth checking out (click on link below each chart to see more information, data, holdings, etc.):

  • FCG, index with exposure to the exploration and production of natural gas;
  • QCLN, index designed to gauge the performance of U.S. clean energy companies;
  • TAN, index comprised of companies focusing on the solar energy industry.

Figure 1 – First Trust Natural Gas (FCG) ETF (monthly, logarithmic scale)

Figure 2 – First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) ETF (weekly, logarithmic scale)

Figure 3 – Invesco Solar ETF (TAN) ETF (weekly, logarithmic scale)

In conclusion, if your trading perspective is rather short-term, pick the most volatile assets and you may want to associate your trading strategy with the use of stops and targets. If your goal is longer-term, then you may prefer investing in stocks and ETFs with progressive entry.

Since those are non-leveraged assets, you may get better control on your exposure and leave more room to let the market breathe and take the opportunity of lower dips to average down.

To wrap up this first part, I provided you with some levels that are potential supports to trade oil and gas, but also alternative energies on the long side to get in with fairly good price levels, whether your investing/trading horizon is short or long-term.

In the next section (stay tuned), we will set the focus on riskier (leveraged) derivative products with exposure to energy commodities and I’ll also provide you with less risky (non-leveraged) equivalents.

As always, we’ll keep you, our subscribers well informed.

Please note that due to market volatility, some of the key levels may have already been reached and scenarios played out. Risk Management: an idea here could be to enter on some potential dips (price getting back to support levels) by allocating one quarter (1/4th) of the position, then averaging down to lower supports with successively one third (1/3rd) and two fifth (2/5th) in case of further dips and depending on the volatility of each chosen security…

Investing entries (long-term; our opinion; support levels for stocks and ETF indexes): Long.

Energy Stocks

Energy ETFs

ALB, 160.57-187.95

FCG, 10-11.34

DCP, 23.02-24.44

QCLN, 53.07-61.81

ENB, 33.05-34.70

TAN, 64.48-75.13

ENPH, 114.85-143.85

SPWR, 14.99-19.75

Thank you.

Sebastien Bischeri
Oil & Gas Trading Strategist

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