Spread Betting Oil
Oil is fast becoming the most popular market for spread betters. Most of us are acutely aware of the ups and downs of oil prices - either through watching the news or seeing the price at the pumps. When there is conflict in the middle east or OPEC makes an announcement to cut production we all feel the pinch. Spread betting offers the opportunity to turn this pain into profit. Spread betting companies usually offer one or more of the following products:
- Brent Crude is the contract for oil drilled in the North Sea. Most of the world's oil is priced relative to Brent Crude so it is a good benchmark for oil prices. Although Brent Crude is traded in London it is priced in dollars.
- West Texas Intermediate is the American equivalent which is traded in New York.
- Nymex is referred to as a sweet oil. It is the oil preferred by refineries because it can produce a lot of high quality petrol/gasoline. It is by volume the largest commodity traded worldwide.
How to spread bet on oil
There are a number of ways you can spread bet on oil, the simplest being to place a bet on the oil price directly. It doesn't really matter which of the products (listed above) you choose as they all tend to move up and down together. Brent Crude is however the most popular and it is the one most talked about. Some traders prefer to bet on the differences between these oil prices. Short term divergences do occur due to such things as regional supply and demand variations. This is quite specialized and requires a bit of knowledge, but can also be quite effective.
When you bet on the oil price you are actually betting on an oil futures contract. A futures contract is a promise to deliver a certain quantity of oil on a certain date. You, of course, don't need to worry about this delivery because you are not making a contract but rather betting on the price movements of the contract going up or down. These are monthly contracts and it is important you are aware when they expire, because your bet will also expire just before this date. However, most spread bet firms will allow you to set your bets to automatically rollover into the next month.
You can spread bet on individual oil companies such as BP and Shell. As the oil price goes up, generally speaking so do their profits and share price. It's not a direct correlation as there are many other considerations such as how well the companies are managed and the success or not of their oil exploration. You can however even out some of these factors by spread betting on the FTSE Oil and Gas sector. An effective way to do this is to place an up bet on the oil and gas sector and at the same time an equivalent and opposite (i.e. down) bet on the FTSE All Share, so as to protect yourself against general market movements.
What drives the price of oil?
OPEC
OPEC (Organization of the Petroleum Exporting Countries) is a cartel of all the main oil producers who collaboratively attempt to set the price of oil by either limiting or increasing production. There is a limit to how much OPEC can set prices. If they cut production right back in order to cause a large price increase, this will damage the economies of importing countries, which in turn damages future demand. It is also difficult to get a group of countries with differing national interests to agree. In the past the US has been able to put pressure on Saudi Arabia, the world's biggest producer, to keep production going. It's a good idea to keep abreast of all these international relationships and interests.
Technology
Technological developments in electric cars, nuclear power, wind and wave energy all have a negative effect on the price of oil. These alternative energies are not ideal spread betting opportunities as their time in development can be decades, yet sudden announcements can knock oil prices. It is wise also to look at developments in oil extraction and drilling methods because most of the accessible oil has now been extracted, thus new technology will be crucial in making the more inaccessible oil economically viable.
The US dollar
Oil is priced in US dollars so if the dollar rises compared to other currencies this will make oil more expensive. This is further compounded by people moving their money out of oil and into dollars. Be aware of the US dollar forecasts.
The oil price itself
When oil prices experienced all time highs in 2008 this had long reaching effects. It made US politicians resolve not to be dependent on foreign oil, but rather develop their own domestic energy. It also suddenly made alternative technologies such as bio fuels and green cars relatively affordable, which led to greater investment in them and to a lowering of world demand for oil. Thus oil has a long term self-regulating effect, whereby spikes lead to a movement in the opposite direction.
Geo-political events can have a significant effect on oil prices. Much of the oil we use comes from areas riven by conflict such as the Middle East. When there is such a conflict pipelines can get turned off, oil tankers can be denied access to shipping lanes and oil can be stock-piled or diverted to military use. If you are spread betting on oil it's important to keep a close watch on world events and have an understanding of the significance of certain events so as to be able to react quickly.
Oil spread betting resources
When spread betting on oil the most important information to keep an eye on is the Weekly Petroleum Status Report issued by the US Energy Information Administration. Whether you are trading in London or New York this will give you an indication of the up and down trends in oil prices.
Keep a close eye on relevant news feeds. Yahoo provides useful rss feeds for various parts of the oil sector:
Crude Oil Technical Analysis Studying these charts can reveal a lot about future price movements and trends.