The energy market is one of the most important industries in the world, with oil and gas being the power behind all kinds of vehicles, which are needed for international trade, everyday travel, and everything in between. In growing economies like India, China, Brazil, and Russia, demand for these energy sources is constantly increasing, especially as their populations rise.
Yet the energy market is also famously volatile, which makes it an ideal choice for those who want to make profits through option contracts.
In the Northern Hemisphere, demand for gas is lower since everyone is spending more time indoors, so the industry spends the winter and spring months (from January to June) building up inventory. Then, once spring and summer hits, everyone wants to drive around for road trips, vacations, and Spring break, resulting in a surge of demand for gas.
Since there’s a general assumption that prices will increase around this time, traders are likely to make purchases in advance and drive prices higher. If there’s a disruption to supply too, prices will rise even more, which can send volatility through the roof. Yet this is fairly likely — for instance, an arctic freeze could prevent access to refineries, or weather conditions could slow transportation to consumption zones like the US and Europe.
However, there’s more to energy products than just gas. Heating oil (which makes up around a quarter of the yield in a barrel of crude oil), is the second most important product after gas. During the winter months in the northeastern US, it makes up around 80% of energy for heating purposes.
Heating oil is also used in Europe, Russia, and Canada. The market works in almost the opposite way to that of gas — producers build up their inventory between June and October, when heating needs are lower. Then, as winter approaches and the climate gets colder, demand begins to increase. Again, traders are likely to drive prices even higher if they make upfront purchases in anticipation, and supply disruptions will make this trend even stronger.
Bear in mind that the Atlantic hurricane season runs between June and November, and it affects a region full of refineries and oil production. This can result in supply disruptions.
Wheat
No food product is more important than wheat — and considering the global population is still rising, its importance isn’t going anywhere any time soon.
In the US, wheat harvest takes place between spring and early summer, and prices are usually at their lowest points just before and after this period due to the high supply in the market.
Most planting begins in September, which is when the crop’s chances of surviving through winter and producing good yields is the highest (while planting before this point can deplete moisture in the soil). Prices tend to be strongest during this period. However, given there can be supply problems if the delicate planting season goes wrong, there may be price volatility and fears of poor supply.
Corn
Corn is another major food source. It might not be consumed directly by humans in all countries, but it’s the most popular source for animal feed, especially cattle. It’s also used to make ethanol in the United States, which in turn is needed for the production of gasoline and corn syrup — a common ingredient in many foods.
Like grain, corn prices usually fluctuate in line with production and harvest seasons. Grain harvest takes place between September and November in the US, at which time supply spikes and prices reach their lowest points. Therefore, prices tend to reach their ultimate low around January. After this point, prices may begin to increase until late June, which is when they tend to reach their highest value due to uncertainty about the next round of crop production.
However, there may be more volatility during the growing season between April and August if there are signs of potential issues, such as late planting or heat damage.
Copper
Humans have been using metal for around 7,000 years, when it was discovered thanks to the ease of mining it and turning it into a variety of tools and weapons. Over time, humans learned to alloy it with tin, which became the dawn of the Bronze Age. Fast forward to today, and copper is the third most-used metal (following iron and aluminum) thanks to its significant commercial value.
Cyclical industries tend to use a lot of copper, including construction and the manufacturing of industrial machinery.
However, the copper market can be volatile since supply can be affected by the geopolitical environment. In many countries where copper mining takes place, the government has a tendency to control the process, which can cause issues for international trade.
Aluminum
Aluminum is the second most-used metal in the world for good reason. It’s resistant to rusting and lightweight, making it the perfect metal for all kinds of modern applications, from building automobiles to forming part of aerospace projects. Many consider it the quintessential twenty-first century metal.
The transport sector uses more aluminum than any other industry — in fact, it’s responsible for almost a third of consumption in the US. It’s followed by packaging, which relies on aluminum for tins, making up 20% of consumption. Construction consumes around 10%, and electric transmission lines used in the US also use a lot of the metal.
The transport sector uses more aluminum than any other industry — in fact, it’s responsible for almost a third of consumption in the US. It’s followed by packaging, which relies on aluminum for tins, making up 20% of consumption. Construction consumes around 10%, and electric transmission lines used in the US also use a lot of the metal.
Gold
Nothing says “wealth” and “luxury” quite like gold. The precious metal is used as a status symbol across the world and is especially popular during the holidays season and Indian Festivals.
Europe and the United States certainly have a taste for gold, but India is one of the biggest consumers. This is especially true of the period between September and December, when the country celebrates a series of more than 100 festivities that attract tourists from around the world.
China hasn’t historically been a major gold consumer — partly due to previous licensing restrictions and regulations — but this is beginning to change. The government has softened its approach by allowing more foreign companies to operate in the country, and consumers have responded positively. After all, the Eastern nation boasts a wealthy and fast-growing middle class, who have a strong demand for luxury goods like jewelry. Now, China consumes around the same amount of gold as India, leaving the two countries tied for the title of “world’s biggest gold customer.”
The greatest demand for gold comes in December and February due to the Christmas season, Valentine’s Day, and Indian festivals. Therefore, jewelry producers and gold sellers start building their inventory in the months following up to this in anticipation of high demand; prices will be higher if demand is expected to be particularly great.
Another major factor to consider is that many investors view gold as a “safe haven” asset, meaning that its price remains stable (or even increases in value) during times of turbulence. It therefore performs well during times of inflation and economic crashes.
Silver
Silver might not have quite the same prestige as gold, but it’s still in high demand and boasts a rich history. Many silver artifacts have been found from ancient societies, such as jewelry and food vessels. This may be due to the high quantity of silver deposits close to the earth’s surface, making the metal easily accessible as well as malleable and strong.
The US Congress started basing its entire currency around the silver in 1792 due to its relationship to gold, and this made the precious metal more important than ever, although the system was eventually abandoned in 1965.
Still, silver remained in demand thanks to its value as a raw material with industrial applications. It has diverse uses in the modern economy, including electronics and photography (along with jewelry, of course).
Most silver production comes from Mexico, Peru, and the United States, which all have mines. However, there are also secondary silver sources, which provide silver through melting coins, recovering scraps, or even taking silver from countries where exports are restricted — but the price of silver obtained from these sources tends to be very volatile. It’s also used frequently in investment portfolios, which adds to the risk.
To manage silver’s volatility, mining companies and other firms that rely on silver may use futures or options contracts.
Platinum
Platinum receives even less attention than silver, but the metal is still heavily used in various production processes. There are actually six metals that fall under the platinum umbrella — the five others are palladium, ruthenium, iridium, rhodium, and osmium. Each of them contains chemical and physical attributes that classify them as important raw materials in industry.
The greatest chunk of demand (51%) comes from jewelry, with automotive catalysts coming in second (29% of demand) and petroleum refining catalysts taking 13% of the supply.
Meanwhile, most supply comes from South Africa, which provides around 80% of the metal. Russia supplies 11% and North America 6%, with the rest of production being distributed across a few other nations in very small percentages.
Part of the reason platinum doesn’t get as much of a mention as other metals may be that it’s actually one of the most scarce metals there is. Just 5 million troy ounces of platinum are produced each year, compared to around 547 million ounces of silver and 82 million ounces of gold.
As you might expect, this scarcity and low supply makes the prices volatile, so many investors view it as an asset that can yield significant returns when approached in the right way.
Coffee
Given the global popularity of Starbucks and other coffee chains, it shouldn’t surprise anyone that coffee is in high demand. Some estimates suggest 400 billion cups are consumed each year, but with the global population growing, that number may now be even higher.
The biggest coffee-producing countries are Colombia, Brazil, and Vietnam — with a third of all coffee coming from Brazil alone. Brazil is often subject to a variety of supply issues, including pests that slow production down, storms that destroy crops, or a lack of rain slowing growth. All of this can threaten supply and therefore send prices upward, especially during the flowering period (which begins in October in Brazil). Plus, if Brazil experiences a frost season from May to August, and prices tend to be high before this is due.
Vietnam may not supply quite as much coffee as Brazil, but it’s the biggest producer of the Robusta variety, which is used for instant coffee. The harvest period in Vietnam runs from October to January, although the usual pattern can be disrupted if the country’s rain season (which normally ends in October) runs on or typhoons (which normally peak from July to November) wreak too much havoc.
Also, colder weather in the Northern Hemisphere tends to encourage more coffee consumption and therefore increases demand.
The mixture of all these factors pulling demand and supply in different directions can make the coffee market volatile.
Sugar
It’s hard to imagine a world without sugar. The white substance is used for all kinds of sweet treats across the world, especially when it comes to seasonal festivities like Christmas, Thanksgiving, Jewish holidays, and many more. Since most of these occasions take place toward the end of the year, sugar prices usually reach their highest point around December.
This isn’t just due to the high demand, but also the quirks of supply. In Brazil, sugar is grown for seven months between April and December — meaning it halts just when demand is highest. Plus, sugar produced in Europe doesn’t have time to reach the market before the busiest season.
Problems with supply, such as the presence of frost or delayed harvests due to weather, can cause further volatility and therefore bias prices upward.
