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A short guide to Investing in the Oil Market with Online Spread Betting

In the past century many have made their fortune and generated great wealth as the late great billionaire J. Paul Getty did from oil.

The ever growing demands on oil supply to power todays 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 high 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 $85.42 as of Janurary 22nd 2008 to $147.27 in July 11th 2008, at that time many industry experts thought oil would continue the established trend and trade at $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 as from 19th December 2008. It has certainly been a roller coaster of a ride for oil in 2008.But its 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.

While the media attention has been driven away in recent months to focus in on the demise of the banking sector, Oil has actually 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 in order. 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 different markets. Spread Betting firms and Contracts For Difference 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. Some will even provide real time market information for relevant trading data such as the weekly Crude Oil Inventories Update.

Once a week, the Energy Information Administration (EIA) gives us a glimpse into what the future demand for oil is going to be by releasing 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.

What the Crude Oil Inventories number report does is give the figure on how many 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.

One of the other organisations that has a significant impact on the price of oil is OPEC- the Organisation for Petroleum Exporting Countries. OPEC is a 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 its statutes, one of the principal goals is the determination of the best means for safeguarding the cartel’s interests, individually and collectively. It also pursues ways and means of ensuring the stabilisation of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.
Something that is keenly awaited by oil traders every month is the OPEC Monthly Oil Report as well as few other bulletins.

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 heavily 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. Although we saw very little pull back in pump prices during the past six months these same experts are predicting that the pump prices are set to rise which in turn could make a big impact to 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 very 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 serious money.

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