Energy Trading Ideas
Hi, I'm taking a class in university and one of our projects is to manage a trade book focused on energy related trades (eg. crack spreads, spark spreads, energy equities, crude, nat gas, refined products, electricity, etc.) and I thought it would be a cool forum post (and also helpful to me) to see what people's best ideas are in terms of energy trades in the current environment, especially given how volatile the climate has been as of late.
Finance 33,
First, most traders are very cautious about sharing their ideas or positions, particularly about anything in the current environment. Personally, I have a about a 15% hit rate on traders willing to discuss their thought process and how they go about implementing trades. Second, not sure what rules surround your book at all, let alone on anything in play. Also a good rule of thumb is that if anyone is sharing their idea, you are already late to the party.
Also, without knowing the full scope of your project, what products you can trade, and how close it is to real life. It would be tough to comment intelligently... That said, here are a couple of favorites from the past that depending on the rules of your sim might be fun to take another look at.
1) If you are looking to capitalize on the crack spread, rather than trade the spread outright and be subject to the volatility, look for independent refiners that are operating at an advantaged crack spread to the simple NYMEX. Some examples that come to mind are HFC, WNR, and VAL. These are companies that run WTI heavy slates and sell much of their clean products in favorable retail pricing markets.
2) One of my favorites was the ethanol blend trade. One gallon of ethanol trades at a discount to RBOB or a gasoline derivative. That means, by blending 10% ethanol into a gallon, you make that entire spread for every 10 gallons of gasoline sold. You can then fix or hedge that margin by entering into an ethanol-rbob swap.
In addition to blending the ethanol and capturing the blend margin, you also would receive a D6 Ethanol rin for blending a gallon of so called renewable fuel. Rin prices are highly volatile and subject to the whims of the EPA and the RFS2 standard.
3) I think the rally in crude oil is overdone and prices will come back down again shortly. Watch the EIA production, storage, and refinery utilization numbers. They are released weekly on Wednesday or Thursday and look at historical info to get a better feel for the numbers.
4) Nat gas is cheap. This will benefit utilities and negatively impact producers.
Good Luck.
Watch this to understand what a refinery turnaround is (trust me im doing you a favor):
Then Check the EIA turnaround report: https://www.eia.gov/petroleum/refinery/outage/
Then start to look into where crack spreads are. Profit?
I would stay away from power (learning curve), and energy equities (dont know what your time horizon is for the class)
An all time classic for sure!
I learned a ton from that video. I think that lady could teach a fish to walk.
Not my proudest fap.
One fairly basic bit of advice I would have is to really understand the factors affecting the supply and demand of each individual leg of the spread in order to understand their effect on the spread. Understand the importance of the ratios of the different legs.
There are some interesting plays on seasonality using calendar spreads that could be worth looking at too. Let us know how you get on.
I've been doing this in a paper trading account for a little while just for fun. Once a week I place a trade before the EIA inventory numbers are released on Wednesday, about 930AM EST. I will either go short or long depending on private industry data reports that basically say the same thing the EIA will say. Say the EIA is forecasting a build in supplies of 1mm barrels, and the private data says a build of 2mm, I'll short it and then at about 10:15 I'll buy it back after the market reacts.
I've gotten a pretty good success rate doing it this way. The only downside is it's just once a week so this strategy without doing it with a bunch of contracts will not be able to make that much money.
Build balances! I wish i had tried to do this in college and it's the breadrock of any good fundamentals trading strategy.
You could try to do US crudes and gasoline, and then trade rbob/brent (rbbrs) off of it. I'd focus in on the gc and just assume that the paper will follow the country's largest physical market. it's not perfect but it'll get you an A. Trade rbob/brent (rbbrs) for example. It'll be like a more focused margin trading strategy, and if you feel good about one part of your balances you can trade spreads in just that product.
High level I would look at it like this: Crude Balance start with current production and stock levels, use refinery outage and UT rates to forecast demand, use DOE data for import/exports, then forecast production increases/decreases and just extrapolate from current regional flows for where they'll end up
Gasoline balance start with current and past stock levels, run a demand forecast out through eoy, doe informed import/export assumptions, and production (refinery outages and UT rates).
smash them together, look at the historics vs price action, and you've got yourself a solid view on rbbrs.
Doing this may be an entire semester's worth of work to do well and without adequate resources you'll probably be wrong, but try diving in with DOE data, bank reports,and sign up for some free data from genscape if you can. You'll learn tons doing this I promise.
If you do this and parts are easy/too hard, then focus in on them and drop others. If you're falling in love with the refinery portion focus on that and trade margins, if you think your crude part is awesoem but gasoline sucks then just trade wti calendar spreads, you could switch out gas for disty as well but good luck with that....
Voluptatibus sit in et quisquam molestias dolor. Voluptatem tenetur quaerat occaecati qui molestiae animi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...