Trading Jobs Energy Trading For Dummies 3 — Questions and Answers
Question 1: What is a 'crack spread' in oil trading?
- The margin between crude oil cost and refined product prices (Correct answer)
- The fee charged to crack open a futures contract
- The gap between two natural gas hubs
- The spread on emissions allowances
Correct answer: The margin between crude oil cost and refined product prices
A crack spread reflects the refining margin between buying crude and selling products like gasoline and diesel.
Question 2: In backwardation, near-term futures prices are typically:
- Higher than longer-dated futures prices (Correct answer)
- Lower than longer-dated futures prices
- Always equal to spot
- Fixed by regulation
Correct answer: Higher than longer-dated futures prices
Backwardation occurs when prices for nearer delivery are higher than those for later delivery, often signaling tight supply.
Question 3: What does 'mark-to-market' mean for an energy trading position?
- Revaluing the position daily to current market prices (Correct answer)
- Selling the position to the market immediately
- Marking a contract as non-tradable
- Setting a fixed price for the whole contract term
Correct answer: Revaluing the position daily to current market prices
Mark-to-market accounting updates the value of open positions each day based on prevailing market prices.
Question 4: Which instrument gives the holder the right, but not the obligation, to buy a commodity at a set price?
- A call option (Correct answer)
- A forward contract
- A swap
- A put option
Correct answer: A call option
A call option grants the right to buy the underlying at the strike price without obligating the holder.
Question 5: What is the main role of an energy trading 'desk' at a firm?
- To execute and manage buy/sell positions in energy markets (Correct answer)
- To audit the company's tax filings
- To maintain physical pipelines
- To set government energy policy
Correct answer: To execute and manage buy/sell positions in energy markets
A trading desk executes transactions and manages the firm's market exposure across energy products.
Question 6: What is 'liquidity' in the context of an energy market?
- The ease of buying or selling without large price impact (Correct answer)
- The amount of crude oil physically stored
- The water content of a fuel
- The number of regulators overseeing the market
Correct answer: The ease of buying or selling without large price impact
A liquid market has enough buyers and sellers that trades can be executed quickly with minimal price disturbance.
Question 7: Why are storage levels of natural gas reported weekly important to traders?
- They signal supply-demand balance and influence prices (Correct answer)
- They determine the exchange's trading hours
- They set the legal tax rate on gas
- They control pipeline construction permits
Correct answer: They signal supply-demand balance and influence prices
Weekly storage reports show whether supply is building or drawing down, directly affecting price expectations.
Trading Jobs Energy Trading For Dummies 3
What is a 'crack spread' in oil trading?