Black Gold
A simple guide to Investing in the Oil Market with Online Spread Betting
The past century or so has seen many make their fortune just as the late great billionaire J. Paul Getty did from oil.
The ever growing demands on oil supply to power today’s energy hungry 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 the world has.
While there are still significant oil resources that lay untapped in areas such as Canada/Alaska as extraction of the oil in these areas is only economically viable at the much higher oil prices seen in the past few years.
The impact in 2008 for the retail consumer was very well covered by the world media and felt hard by us all globally as the price of oil soared from $85.42 as of Janurary 22nd 2008 to $147.27 in July 11th 2008, at that time many industry experts predicated oil would continue the established trend and trade at the high price of $200 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 $32.40 on the 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 on the other hand of course to have made significant losses.
Whilst the media attention seems to have drifted away in recent months to focus in on the demise of the banking sector, Oil has been making a spectacular recovery from the $32 December lows to hit $70 in recent weeks, the industry experts are now calling for $85 dollars a barrel whilst others suggest a short term correction may be on the horizon. Whatever the future holds 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 Spread Betting 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 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, the Energy Information Administration will release a small glimpse of what they think the future demand of oil is going to be by releasing its Crude Oil Inventory numbers. Traders will take a look at this information because the amount of oil that commerical firms have within their inventory in turn impacts the price of oil in predictable way when taken into account with other factors in determining the future oil prices.
The Crude Oil Inventories number reports the number of barrels of crude oil commercial firms have in inventory. Commercial firms will report their inventory levels to the EIA on a weekly basis, however the EIA must still have to take some estimates to arrive at the final number they get.
Another large organisation which has major impact on the price of oil is known as OPEC – the Organisation for Petroleum Exporting Countries.OPEC is a large cartel of twelve 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 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 in 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 spread betting 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 can also be made relevant for small as well as medium sized businesses exposed to the oil price moves- from hauliers, farmers and fisherman to practically any business that can be impacted by rising fuel costs. Big business has done this for 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 some real serious money.
Sam Sparro – Black and Gold
