A rough guide to investing in the Oil market with Online Spread Betting
Published by Manny on Tagged Finance-Investing
The last century has shown that many have made their fortune and generated great wealth just as the late great billionaire J. Paul Getty managed to do from oil.
The ever increasing demands on oil supply to power today’s energy needing consumer, continues to grow globally for oil as the energy source of choice for cars, heating, machinery etc. Countries experiencing significant growth cycles such as Russia, Brazil, India and China continue with their increased consumption to fuel their growth ambitions, placing even more demand on the finite oil resources.
Whilst significant oil resources still remain untapped in areas such as Canada / Alaska, extraction of the oil in these areas is only economically viable at the much higher oil prices seen in recent years.
The impact in 2008 for the retail consumer was well covered by the world media and felt hard by us all globally as the price of oil soared from .42 in January 22nd 2008 to 7.27 in July 11th 2008, at that time many industry experts predicated oil would continue the established trend and trade at 0 a barrel. The credit crunch and resulting cycle of wealth destruction globally during the second half of 2008 impacted demand for black gold with the price per barrel falling to .40 on 19th December 2008. 2008 showed one thing and that was that oil had been through one big roller coaster of a ride. But it’s an opportunity for those in the know - the speculative investor - to make significant gains from trading, or of course to have made significant losses.
Whilst the media attention has slowly been pushed away in recent months to focus on the bigger demise of the banking sector, Oil has slowly been making a spectacular recovery from the December lows to hit in recent weeks, the industry experts are now calling for dollars a barrel whilst others suggest a short term correction may be in order. Whatever the future throws at it, the oil trader and speculator has the opportunity to profit from such moves if their opinion on the direction proves to be correct.
For the retail investor gaining exposure to either NYMEX Crude or BRENT Crude at first may not seem that straight forward, whilst the opportunity to trade Oil Company stocks or purchase Exchange Traded Funds (ETFs) (which can provide exposure to oil prices) has traditionally been the only obvious route through your online stockbroker, Financial spreadbetting and Contracts for Difference (CFD) trading makes accessing these commodity markets relatively straightforward. Investors can then take either long or short positions via the spread bet or CFD and trade the fluctuations in price in this and many other different markets. Spread Betting firms and CFD trading providers also provide a wide range of market information, charting resources and trading technology which gives the retail investor access to a wide range of information. The weekly Crude Oil Inventories Update will actually provide real time market information for relevant trading data.
Once a week, every week the Energy Information Administration (EIA) releases a small glimpse into what the demand for oil is likely to be in the future by usuing its Crude Oil Inventory numbers. Traders look for this information because the amount of oil commercial firms have in inventory impacts the price of oil in a relatively predictable way when taken into account with other factors in determining future oil prices.
The Crude Oil Inventories number reports the number of barrels of crude oil commercial firms have in inventory. Although commercial firms will report their inventory levels to the EIA on a weekly basis the EIA must still make some estimates to arrive at the final number.
Another large organisation which has major impact on the price of oil is known as OPEC - the Organisation for Petroleum Exporting Countries.The OPEC is a group of twelve different countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. The cartel is headquartered in Vienna and hosts regular meetings among the oil ministers of its many different Member Countries.
According to the statutes of the cartel, one of the main goals is the determination of the best means for safeguarding its interests, individually and collectively. On top of this it also pursues different ways of ensuring the stabilisation of the prices in international oil markets, with the view of exterminating harmful and unnecesary fluctuations; at the same time giving regard at all times to the interests of the nations producing and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and of course a fair return on their capital to those investing within the peroleum industry itself.
OPEC issues a Monthly Oil Market Report and various other bulletins which again impact market pricing and are keenly awaited by oil traders globally.
Whilst trading oil may seem the preserve of an elite group of traders in London, Chicago or elsewhere in the globe, the price of petrol or gasoline directly impacts nearly everyone in the developed world. It impacts the cost of transporting goods and services to every area of the globe and as we saw in 2008, this can have a negative impact both on the price we pay for personal transportation at the pump, but also the cost of basic food and services we rely on to run our day to day lives. While we sat back and saw very little pull back in pump prices during the past 6 months these same experts predict a return to higher pump prices in the not too distant future which could impact us all.
Some have therefore turned to spreads and CFDs to hedge their exposure to rising fuel costs by placing medium to longer term trades which pay out if oil prices rise across the globe. This approach is also relevant for small and medium sized businesses exposed to oil price moves - from hauliers, farmers and fisherman to virtually any business impacted by rising fuel costs. Giant companies have done this for many years,airlines hedging fuel costs to ensure any unexpected sharp rises in crude do not impact their budgetary plans in any fiscal year. In 2008 many haulier firms folded due to the rising cost of fuel but also due to fuel taxes in the UK remaining high - approximately 61% of the cost paid at the pump is tax revenue for the UK government, European haulier firms subject to lower fuel taxation were able to generate a significant competitive advantage against the UK haulage business at this time who were left unable to pass the full cost of rising fuel onto their customers.
Beyond hedging, spread betting and CFDs also allow investors the opportunity to trade on oil companies’ stock prices - from the Exxons, Shells and BPs of this world to the smaller exploration outfits, drilling as Getty did over half a century ago for that next 20,000-barrels-a-day oilfield and the opportunity to make a lot of money.
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