Brent Crude Spread Betting

Trading the Oil Price

Trading the Oil Price by InterTrader

1. Crude Oil is the raw material that when refined is used to produce diesel, gasoline, heating oil, jet fuel and many other petrochemicals. But oil is not only an importance source of energy, it is also the most actively traded commodity on a global scale.
2. Crude Oil is traded globally in terms of ‘Barrels’. 1 Barrel is equivalent to 42 US gal (164 litres). Although this is how the product is traded it is interesting to note that the Crude Oil never actually sees the inside of a barrel anymore but is transferred directly on and off vessels.
3. Oil prices having been hammered by a combination of global oversupplies from the continued pumping of OPEC members and from the rise of hydraulic fracking that has boosted production in the United States greatly, from from 5.6 million barrels a day in 2010, to a present rate of 9.3 million. Meanwhile countries like Saudi Arabia and its Gulf allies like the UAE, Kuwait and Qatar, now produce over 18 million bpd leaving limited scope for other countries such as Iran, Libya and Iraq to take advantage of their oil. There are also questions lingering around Iran – if the economic sanctions are scrapped, what will happen as Iran penetrates the global markets and how will countries like Saudi Arabia react to a new regional rival?
4. A slowdown in China is likely to see jitters on the demand side of oil. Conversely, a rise in geopolitical concerns or increasing demand (say from China) can both spike the oil price as well increased speculation. In the past century for instance a number of people have made a fortune and generated enormous wealth from oil; case in point the great billionaire J. Paul Getty. In 2014 crude prices were curbed by the easing of disruptions in supplies (ease of sanctions in Iran, increased exports from Iraq and Libya) and the ramp up in production from USA shale. Furthermore, oil is traded in dollars so should the USA continue cutting its quantitative easing programme, this could lead to a rise in the USA dollar and a consequent decline in the price of oil.
5. Shale oil describes reserves of crude trapped in shale rock which require the application of drilling techniques such as hydraulic fracturing or fracking and horizontal drilling to be produced.
6. Oil as a commodity isn’t traded just between firms, but it is also present in a commodity exchanges where a number of commodities and derivatives are traded. The main scope of commodity exchanges is to reduce the risk for oil companies, whereby market participants buy a particular quantity of oil that will be produced at some point in the near future. This helps oil companies quantify the demand for the commodity but this also fueled speculation on the oil price. Between 1998 and 2008 oil climbed from $10 a barrel to nearly $150 a barrel. The oil price rose from $85.42 in January 22nd 2008 to $147.27 in July 11th 2008; at which time a number of industry experts predicted that it would eventually hit $200 a barrel. However, the credit crunch and consequent cycle of wealth destruction had a dramatic effect on the price of oil which fell to a low $32.40 on 19th December 2008 as demand for oil faltered. Oil has since risen again given uncertainties in the Middle East. Those wild fluctuations offer opportunities to the discerning speculator.
7. Oil prices are also subject to cyclical and weather trends. For instance hurricanes can disrupt production and half operations in the Gulf which would push oil prices higher. And, while the tsunami that struck Japan has somewhat reduced demand for oil in that country, the growth of emerging markets continues unabated and makes oil an attractive investment. Indeed, according to Longview Economics, China’s share of world oil consumption is predicted to increase from 9% in 2008 to 20% in 2020. Having said that huge oil wells still remain untapped in countries like Canada / Alaska but the extraction of this oil is only economically viable at the much higher oil prices we have seen in 2008.
8. Interest in spread betting on oil has been rising strongly particularly when the commodity is at its most volatile. For instance last year IG has seen more than 32,000 trades with a total market exposure of more than £1bn.
9. Unless you are very rich and have a brokerage account which gives you the right to trade futures it is best to use a spread betting provider to trade oil. Each futures contract gives exposure to 1,000 barrels of US light crude and with oil trading at $100 this equates to a total of $100,000. Exchange traded commodities are another option but these are more suitable for buy and hold investors than day traders. Spread betting allows you to trade oil on low margin. But, not only that; a spread bet has the advantage that the underlying mid-price of the commodity is tracked.
10. In the short-term the price of oil is impacted by the release of weekly US oil inventory figures each Wednesday at 3.30pm. Every week the Energy Information Administration (EIA) publishes Crude Oil Inventory numbers which gives us an insight into what future demand for oil will be. Commercial firms report their stock levels to the EIA on a weekly basis, but the Energy Information Administration (http://www.eia.doe.gov/) still has to make some estimates to deduce the final number of stock numbers of barrels of crude oil. You can see the most recent Crude Oil Inventories report here. The amount of oil commercial firms have in inventory directly impacts the price of oil in a predictable manner so this report is closely scrutinized by traders. Unexpected shortages of inventories can lead to a short burst in the price of oil. However, in general the oil market tends to be affected by quite a number of variables ranging from the the stability of Nigeria’s political system to North Korean’s missile testing programme. Besides supply and demand other factors to consider for instance include political interference and the regulations of different countries.

1. Note that oil is not viable for production of electricity. It was back in the 70’s and 80’s but since then it has not been able to come near gas or coal. Crude is currently $12.33 per million BTU and gas is £4.20 per MBTU. So crude would have to fall to $25 ish to become a viable alternative electricity generation. Nuclear and windpower are not commercially viable in their own right and actually cost more than oil if you factor in the capital costs. Nuclear is still and always has been the most expensive with coal the cheapest. It’s all about politics. Crude is now dependent on cars, home heating and chemical industries and so is a supply and demand commodity currently being propped up by speculators in bulk storage. Imo peak gas is far more important than peak oil.
2. The famous (or infamous) OPEC (Organisation for Petroleum Exporting Countries); a cartel of twelve countries Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela also has sizable influence here. Organization of the Petroleum Exporting Countries (OPEC) was established in 1960 to strengthen and protect the interests of oil producing countries. Headquartered in Vienna the Cartel controls about two-thirds of all oil produced worldwide and the Opec’s main goal is the safeguarding of the cartel’s self-interests – individually as member states and collectively as a cartel particularly from Western oil companies who try to drive prices down. The cartel aims to stabilise the price of oil balancing the interests of the producing nations and the necessity of securing a regular supply of petroleum to consuming nations at an acceptable return to investors who invest their capital in the oil industry. The OPEC also issues a monthly oil market report and a number of other releases which also impact the oil market so are eagerly awaited by oil speculators globally. The Group intervenes directly by cutting or boosting production to stall the decline (as happened in December 2013 when the Group agreed to cut production by 2 million barrels to stop the oil price from continuing to fall) or stabilise oil prices in the interests of member countries. However, it is worth noting that the grip of OPEC on the world’s oil supply has somewhat weakened in recent years although it still provides the majority of the world’s oil supply. The findings of sizable oil reserves in Alaska, the North Sea, Canada, the Gulf of Mexico, as well as the opening up of the market in Russia, have all weakened its influence.

1. Saudi production costs is thought to average just $10-$20 a barrel while the cost for an Oklahoma-based company Continental Resources to drill in North Dakota is about $40-$50 a barrel. However, the Saudi government relies on its oil generation for massive subsidies for its people and lavish lifestyle of every member of its royal family and when you add all this up Saudi Arabia needs a price of about $86 just to breakeven its budget. Saudi Arabia is only able to afford low oil prices because it has a rainy day fund of at least $750 billion going back to the day when oil prices were much higher.

1. The longer-term chart of the cost of a barrel of crude oil reveals a rising but increasingly volatile trend that has seen the price move up from around $30 in the latter half of 2003 to over $100 in the first quarter of 2008. Today it is not unusual to see swings of 2 to 3 per cent in a day in the price of brent crude oil.
2. In general, energy and metal markets are leading indicators of inflation, so the financial community watches them very closely and it is useful to keep an eye on them. Oil has an inverse correlation with the dollar. There is also a high historical correlation between the price of crude oil and the price of gold. Generally, the price of an ounce of gold is 10 times the price of a barrel of oil. Partly, this is because mining gold is an energy intensive process and the cost to mine an ounce of gold will increase as the price of oil increases and also because they are both commodities and often affected by the same economic stimuli So buying gold is one way for a speculator to bet on the price of oil going up.
3. The Norwegian Krona is heavily dependent on the price of oil and the currency weakened substantially against the USA dollar when the oil price was under severe downward pressure. You can use this link in the exchange rates to take a view on the oil price although in such instances you also have to regard any other fundamentals that might affect the currency pair.
4. When trading oil be prepared for quite a lot more volatility than you would see trading say the FTSE index. If you’re the sort of person who monitors their portfolio every day, could you stomach watching your holding wobbling by up to 5% every day? If you’re faint hearted, it may not be for you.

Legitimate reasons why you might want to invest in Oil:

• To hedge the cost of fuel.
• Maybe you believe a rising oil price could hurt stocks.
• You believe inflation is a threat, so want to buy real assets.
• Some analysts believe that oil prices below $80-$85 are unsustainable in the long term.
• The supply/demand balance for oil is just out of balance by around 2%, yet oil prices have fallen sharply.
• Shale, deepwater drilling and oil tar sands need much higher oil prices and cheap access to capital so production at present prices will be curtailed in the long run.

What’s happening in the Global Oil Markets:

Updated January 2016: In the past OPEC had the power to move global oil prices by either cutting back or increasing oil flow from their wells because the marginal supply of a commodity like oil largely sets the end price. One or two millions barrels production per day of over-supply or under-supply can make all the difference in this market.

The American shale revolution led to several million barrels of extra supply per day entering the market which sent oil prices sharply down 35% by the time the OPEC countries met in November 2014. Instead of curbing production to stem the decline in the oil price the Saudis decided to do the opposite and have actually increased oil flow. This pushed oil prices down further as yet more oil hit a market which was already in glut but the Saudis didn’t blink.

What is the logic behind what the Saudis are doing? It is well known that gulf countries need oil prices of at least $80 to balance their domestic budgets (albeit Saudi Arabia has amassed a war chest of $700 billion in cash reserves to help it cushion any budget shortfalls) but some analysts believe that Saudi Arabia is persevering with the reasoning that the lower the price of oil, the better, as it gets rid of the marginal producers, thus ensuring that they protect their market share in the process. Saudi Arabia believes it can tolerate low oil prices for much longers than the shale oil producers in the States; many of which are small companies and already heavily-indebted. The Saudis are also concerned on how quickly the USA shale output will increase when oil prices start recovering. USA capital markets are very efficient and have ample capacity to pour resources into shale expansion almost immediately if prices, and profits start going pushing back up. Drillers in the states can get permits and drill shale wells in weeks. America has in effect unexpectedly emerged as a big source of swing supply in the process. Shale technology is developing rapidly and allows for very swift increases in oil production at volumes that can swing global markets. Overall operation efficiency – measured in amount of oil produced per rig has already improved some 400% in the past 5 years and improved 40% in the last year alone. It took just around 6 years for the USA to increase production to around four million barrels per day.

In time, oil prices will recover because petroleum is a cyclical commodity and so far there is no evidence that the cycles will stop. It is all about how long it last and how high or low each peak or bottom will reach. In the price war that we are witnessing, OPEC is hoping to prolong the cycle to ensure that many USA shale producers are squeezed out of business before prices start recovering and spark another American shale boom. Just recently the USA congress decided to withdraw the law that till now, prohibited USA companies from selling their crude oil to overseas buyers – a legislative piece of regulation dating back to the Arab oil embargo of 1975 – which law no longer seems relevant. This is a once-in-a-lifetime transformation in the global oil markets and the future looks to be an extended period of gluts with prices limited from spiraling upwards by the swift addition of many shale wells that could be started every time prices recover some ground.

Why the Oil Price could be declining:

• A Chinese economic slowdown.
• A rising USA dollar.
• Rising North American supply created by gas oil fracking.
• OPEC oil production has stopped declining and has been increasing.

Companies that are likely to benefit from an Oil price decline:

Consumer Cyclicals like Transport, Airlines, Automotive, Retail, Travel and Leisure. Airlines are an obvious beneficiary of lower oil prices. Cheaper jet fuel means bigger profits. This effect is most strongly felt by the budget airlines, since fuel accounts for a much higher percentage of their costs. Also, their competitive advantages become amplified as prices contract.

Like EasyJet, IAG and Ryanair are both major airlines which are likely to thrive on lower jet fuel prices. These cost benefits will feed through to the wider travel industry too as people are likely to spend more on travel. Tour operators, Tui Travel and Thomas Cook, should see some positive effects as well as cruise ship operator Carnival and hotel group Intercontinental. About 20% of Carnival’s cost base is associated with fuel costs and lower crude prices should contribute to the cruise operator’s bottomline. Lower fuel prices should also help transportation (rail and bus) stocks, First Group, National Express and logistics stocks such as Stobart or Wincanton.

Finally, it’s important to remember that lower oil prices can benefit consumers in a number of ways, which in turn will affect the economy and the stock market. A long term drop should bring cheaper petrol and lower household energy bills. Both good for the consumer’s bank balance. It can also help to keep the breaks on inflation, which means wages go further. Increased consumer spending would then help to boost retail stocks. So the likes of M&S, Next or Sports Direct could also indirectly benefit from the oil price crash, albeit with a greater lag.

It appears that the United States of America is producing even more oil as they reduce their oil rig count. This may sound contradictory but one has to keep in mind that rigs don’t produce oil. Rigs serve to drill wells. A well is completed and then it might be fracked and be put into production (with a consequent considerable time lag). Meanwhile, the rig might or might not be utilized to drill another well. It is also worth noting that rigs now drill wells in half the time so only half the rigs are required to drill the same number of shale oil wells.

Companies that are likely to suffer from an Oil price decline:

This would include Energy, Oil capex, certain Chemicals, Utilities and Capital Goods shares. Big losers would include the oil service companies. Deep water drillers such as Transocean who rent rigs for as much as $650m each are likely to get hit hard. European oil services companies will also likely see harsh times particularly if they are already burdened by debt.

Energy is everything for a macro economist as it is a tax on the economy when high, and a discount when low.

Let’s consider the hedging argument. Suppose you work in the road haulage business or operate tractors – the cost of fuel/petrol might be a big chunk of your costs. If you are concerned about higher petrol prices, placing a short bet on the price of oil could be one way to remove some of the downside. However, do keep in mind that the prices of oil and petrol aren’t exactly correlated (due mainly to fuel taxes).

Trading the Oil Price by David Jones

How high will the Price of Oil Go?

Here we are in mid-2016:

Bearish Opinion: $60 then shale starts up again in earnest already some are getting the drilling rigs moving at $50. Demand is going to have to be very robust, or some some other countries come offline, to get through the $60+ mark.

Bullish Opinion: That is a rather one dimensional view on POO. Let’s take into account declining production across the globe due to lack of investment, lack of new fields etc. We will not see the full impact of this underinvestment but mark my words it will be significant and will hit like a sledge hammer in the next 12 months. It cannot be ignored also all the big producers are in unstable regions which can pop at any moment. ME say no more. Africa say no more. Venezuela – broke. Russia – broke

Crude Oil Spread Betting

1. Traditionally, it was not straightforward for a retail investor to gain direct exposure to NYMEX Crude or BRENT Crude and trading oil stocks or ETFs provided indirect routes to exposure to the oil price. Spread betting and CFDs changed all this as they allow you to gain pure exposure to the oil price without the currency risk. And they also allow you to short the oil price…
2. Most spread betting providers quote prices for the two main oil futures contracts – the US Light Sweet Crude contract which tracks the value of West Texas Intermediate (WTI) and Brent Crude – both of which are traded round-the-clock from Monday morning to Friday evening. Both are also priced from the corresponding futures contracts and you need to be aware that the underlying futures are monthly contracts which are prone to be volatile when the expiry date approaches.
3. US light sweet crude oil started trading on the New York Mercantile Exchange (NYMEX) in 1983. Each contract giving exposure to 1,000 barrels and the pit trading session runs from 3pm to 7.30pm although futures can still be traded electronically on Globex round-the-clock.
4. Brent crude futures are traded from 2am to 10pm on the International Petroleum Exchange. Brent Crude accounts for two-thirds of the world’s traded oil and liquidity starts to build in this contract at 10am, which is when the old pit trading session used to begin.
5. Capital Spreads offers exposure via spread betting on the price of the ‘West Texas Intermediate’ (WTI) futures contract which is traded on the New York Mercantile Exchange (NYMEX) and is the most popular grade of crude oil that is traded.
6. Most providers define a tick size as a 1c move in the cost of a barrel of oil and the minimum bet is typically £1 or £2 a point, with an initial margin requirement of 200 to 400 times the stake (depending on which provider you use).
7. So with oil trading at $45 a minimum stake of £1 would equate an exposure of $4500. For someone who has bought at $45 and closed his position at $56 would be sitting on a profit of around £1100 (assuming a £1 stake).
8. Most spread bets tend to be short or medium term. This is partly because the liquidity in the futures market tends to be concentrated in the first two months.
9. You can either open a daily rolling contract which comes with a spread of around 6 to 7 points or place a spreadbet on the monthly futures (usually the COMEX two-month futures contracts) – the latter which of course is more suitable for taking medium-term trades.
10. If you are an intraday oil spread trader make sure to keep an eye on the expiry of futures contracts as prices tend to fluctuate considerably during such times
11. Be careful about buying oil on excessive strength (i.e. don’t get caught up in the hype). Always try to buy on weakness.
12. Crude Oil is very volatile and may be subject to gaps exceeding 50 points when the weekly inventories data are released or when the futures contracts expiry date approaches. So beware of delays of executions (look for another provider if your current one starts delaying your trades) as this would be just like giving away the control of the position – if you intend to day trade oil you really need instant executions to handle the volatility and leverage. You may also want to consider take out a guaranteed stop (which comes at an additional charge…) to avoid slippage. Better still you can pairs trade – say bet on the gap between Brent Crude and West Texas Intermediate narrowing or widening.
13. One interesting strategy known as the ‘WTI-Brent arb’ revolves around trading the price differentials between the WTI and Brent Crude oil contracts. Normally, the difference between the two contracts remains fairly constant so it is possible to identify when this balance has been broken and trade the two contracts in opposing directions until equilibrium has been restored – making a profit in the process. The basis of this strategy is that traditionally, Brent Crue and WTI trade within a $2 lag of each other but sometimes this pricing synchronicity has been distorted so traders use pairs trades (say, selling Brent Crude and buying WTI) to trade the price differential with a view that the gap will narrow.
14. Another possible but riskier strategy is to trade against the balance between the WTI and Brent Crude contracts based on fundamental analysis. For instance, the Middle East troubles are likely to impact the Brent oil price but why should the West Texas Intermediate contract keep its pace when the WTI is produced and consumed within the USA?
15. Note also that you can use spread betting to trade on oil companies’ stock prices – from the Exxons, Shells and BPs of this world to the smaller exploration outfits, drilling as the famouse Getty did over 50 years ago for that next 20,000-barrels-a-day oil field and the opportunity to make serious money. Although, in such cases you have to take into account diverse factors such as the quality of management and exploration potential as well as the oil price.
16. Conversely if you believe that the oil price has peaked and is about to retreat an obvious play would be the airline companies. For instance Airline Ryanair was recently making up to 7% of the total revenues on equities spread betting on paddypower due to a fall in the price of crude oil.
17. To conclude Oil is a good commodity to trade. It gets both ample press and is easy to trade, it is also a highly liquid market and although it moves a lot you are able to get out anytime as it’s virtually a 24-hour market. Remember that oil is more volatile than the FTSE and even the foreign exchange markets and oil prices can easily move $3 in a trading day so it is essential that you make use of stop losses. The volatile nature of this energy market means that you can quickly find yourself on the wrong side of a trade and with a leverage spread bet, a small move against you can translate into a considerable loss.

Trading Oil Futures and Oil ETCs

Other ways to trade Oil is to trade in shares in oil production companies or oil futures. Futures are however not for the faint-hearted or beginners as futures trading requires careful risk management and a disciplined approach. An oil futures contract is nothing more than a bet on what the price of oil will be at some time in the future. Each contract is for 1000 barrels of oil and requires the trader to place an initial margin set by the exchange, currently $12,000. At a price of $136 per barrel of light sweet crude, that $12,000 initial margin covers a position of $136,000.

If you bought a future at $136, say, and the price moved to $140 within the specified time (giving a contract value of $140,000), you would sell a future with the same expiry to close the position and pocket $4000, a return of 33% on your initial margin. Likewise, if you sold a future at $136 and the price moved to $132, you would buy a matching contract to close the position and pocket $4000. Of course, those returns would be losses if the price moved against you.

Exchange Traded Commodities also provide a simple way to get exposure to Oil. You can even bet on a falling oil price by shorting an oil ETC. The risk with Exchange Traded Commodities is that they are only as secure as the company that backs them (as in the AIG crisis with the collapse of the Lehman Brothers in 2008). Also, most ETCs only use financial instruments to get exposure so they are not directly buying the physical oil and thus it is not guaranteed that an oil ETF will closely follow the oil price. This is because an oil ETF works by buying and selling futures contracts as opposed to storing the physical commodity which means that the underlying oil price may not always be tracked as futures prices do not perfectly mirror the oil price. For instance should future prices rise too sharply above the spot price, commodity producers are likely to sell at the futures price while delaying their production back from the current markets, pushing them back into balance (this is referred to as ‘contango’).

Other than that you can invest directly in oil explorers and oil producers but this is risky and requires different skill sets. For instance for explorers you need to balance probable versus proven reserves and evaluate the cost of extraction. Some keen investors even scan through seismic and drilling reports to try to find something even the analysts have missed.

We can grow trees and plants (which oil is originally from) so why can’t we make Oil?

Is it too energy intensive? Is much chemistry being done in this field? Do we have any chemists left?

We can make oil, fuels and chemicals from trees and plants. It’s trivial chemistry to convert vegetable oil into high quality diesel fuel – it’s so easy you can do it in your garage. There are many businesses around that will collect waste oil and fat from restaurants and food processing factories and sell the resultant biodiesel.

You can easily ferment cereal crops or sugar crops into alcohol – this has been done for thousands of years for beverages, but there’s nothing to stop you refining the alcohol so that it reaches fuel grade. The pure ethanol can be mixed with petrol and used in standard cars.

The problem with both of these is scale – the amount of oil based fuels used is astonishing. The amount of land required to produce that fuel would be vast. The other problem is that Western agriculture, particularly in the US, is very heavily dependent on fertilizers and mechanization. Fertilizer is made from hydrogen, which is made from gas. The farm equipment and transport all use diesel. Then you need a lot of energy to run your processing plant (particularly if you are making alcohol).

In the US, the manufacture of ethanol from corn is highly subsidised. This has prompted enormous demand for corn, and has sent prices sky rocketing. There is also controversy because the conversion of corn to ethanol is very energy intensive, and some academics suggest that given the inefficient farming methods used, there is only a borderline energy gain; i.e. for every 10 barrels of oil saved because of the ethanol produced; the farmers and processors used 8 barrels equivalent of gas, oil and electricity to get there; not to mention the loss of prime arable land for food production.

Spread Betting on the Oil Price by IG Index

Trading Brent Crude

Brent Crude is one of the major oil standards on which you can spread trade. The price is very volatile, which means you need to stay on top of it, but also gives great opportunities for profit since any market that tends to rise or fall could result in potential profits for traders who choose to spread bet by going long (buying) and short (selling) on their trades.

The first thing to understand is what constitutes a one point move in crude oil. If a trader decides to buy crude oil at £1 per point, using financial spread betting, then a 1 point move is normally equivalent to a 1 cent move in the oil price. So if you bought £2 a point when the oil price was trading at $91 per barrel and the price dropped to $90, then this translates into a £200 loss because the price has dropped 100 points.

The Brent Crude Oil price has been a popular trade for traders, particularly given that it has been trading at a premium over West Texas Intermediate (WTI) crude oil for quite some time now. The narrowing of the premium has often presented a good entry for a long West Texas Intermediate Brent trade in particular when the differential has gone up over the $20 mark.

Going Short: US Crude Oil

The current quotation for the US Crude Oil Daily Future spread price is 10,953.0 – 10,960.0. If you think the price of crude oil is going to fall, you would want to place a spread bet for, say, £6.40 per point at the sell price of 10,953.0. In order to open this position you might need to put down a margin of say, 160 x stake, which is (160 x £6.40 per point) = £1024.

In the next few days the price of crude oil comes under pressure on the New York Mercantile Exchange (NYMEX) following worries over a reduction in global demand. Assuming you are successful, the US Crude Oil Daily Future Spread may now be trading at 10,822.5 – 10,829.5, and you can close your bet and realize your profit. As it was a sell or short bet, the bet closes at the buying price of 10,829.5. This is how you figure out your gains: –

• the bet opened at 10,953.0
• the bet closed at 10,829.5
• the difference in points is 123.5
• your bet was for £6.40 per point
• by simply multiplying, you see that you have gained £790.40

Sometimes your positions will go against you, so you need to be able to figure out your losses, too. Say the price rose to 10,986.3 – 10,993.3, and you decided that you needed to close your bet to minimize how much you lost. In this case, this is how you figure out your loss: –

• the bet opened at 10,953.0
• the bet closed at 10,993.3
• the difference in points is 40.3
• your bet was for £6.40 per point
• multiplying this out, you get a loss of £257.92

 

Going Long: US Crude Oil

You can also trade futures style bets on crude oil, where there is no interest charged or received until a certain future date. These typically have slightly bigger spreads to cover the dealer’s costs. For a bet two months away the current quote is 10,904 – 10,913. Say you placed a bet for £4 per point that the price would go up.

Even though the bet does not end for a couple of months, you can cash it in any time that you’re making a profit. Perhaps the price increases to 11,136 – 11,144, and you decide to collect your winnings. Again, the calculation is straightforward: –

• the bet opened at 10,913
• the bet closed at 11,136
• that is a point gain of 223
• your bet was for £4 per point
• which means your profit is £892.

Once again, you must always consider the case that your bets may not win, and be prepared to close the bet for a loss before the loss becomes too large. Say the price fell down to 10,867 – 10,875, and that was the level at which you decided that the bet was not going to work, and cut your losses by closing it.

• The bet opened at 10,913
• the bet closed at 10,867
• the number of points you lost is 10,913-10,867
• so the total loss is 46 points.
• Your bet was still for £4 per point
• which means you lost £184 on this wager.

 

How to Spread Bet Brent Crude

Most people are familiar with North Sea oil, and the massive Brent field was discovered in 1971. Even though there had been minor discoveries for years previously, it was this field which really transformed the oil production offshore of the UK. Nowadays, Brent Crude is one of the common standards used when describing the quality of oil which is bought and sold in futures contracts, as well as on the “spot” (immediate) market.

Oil trading is recognized to be one of the major and most volatile financial markets, and fortunes are made and lost every day. For instance the oil market has endured a volatile year as sanctions imposed on Iran over its nuclear program has disrupted approximately 5% of daily output which sent crude prices soaring. With China growing aggressively and consuming more oil in the process, prices were pushed from an October 2011 low of $74.93 to a February 2012 high of $109.95, a gain of approximately 46.7%.

These surging prices weighed on the bottom line of airlines and so stocks like International Consolidated Airlines Group (IAG) began to underperform relative to oil stocks like BP (BP.). However, provided that you exercise due care in your spread betting, volatility in the price is a good thing, as it can permit to make larger profits more quickly.

Oil prices are quoted in US dollars, as that is the major financial market for futures trading. More correctly, they are quoted in US cents, as for example the current price of 10,966, which corresponds to $109.66. This is the price per “barrel”, a historical reference as barrels are no longer used to transport oil. The standard barrel contains 42 US gallons, and a standard futures contract is for 1000 barrels. The North Sea oil platforms pump nearly 1,000,000 barrels per day, but a decade ago it was nearly 3 times this amount.

The gold and the oil markets both experienced an upward trend over the last few years boosted by ever increasing demand from China, the world’s second largest oil importer. Speculators have been jumping on the momentum, buying on the dips and possibly holding the position for weeks. Spread betting on these markets means that any profits are tax free and there is greater flexibility over the size of the exposure than there is when trading the futures contracts directly.

Oil is a very interesting play at the moment, you have so many factors contributing to the long case. For one, it’s geared to the economy in the USA and emerging markets on the demand side, which is still yet to win a lot of people over following the concerns last year. Rather like equities, more people to win over – and more purchasing managers to win over – means a greater potential for upside if you believe that argument.

Secondly, inflation in the US economy tends to be good news for commodities, and inflationary growth is definitely good for oil. Thirdly the supply side which is fairly obvious, in both the short and long term, geopolitical tension hikes the price. Finally, oil is starting to get attention in the USA mainstream press again thanks to that tension. If the price gathers momentum beyond $100, the retail investor could be the key to any big move.

Recently it has been announced that the estimates show half of the oil in the North Sea fields has already been extracted, and oil production fell in 2011 due to “maintenance and other production issues”, according to the Department of Energy. The fact is that many experts have said that “peak oil” (which is identified as the maximum annual world oil production) is already past, so although supplies have not run out yet, the available oil is going to be increasingly limited in future years.

The problem is, the above analysis is all well understood by Wall Street, the City etc. So it would require news to come out to exacerbate those factors, otherwise it would already be (mostly) in the price. But if you’re convinced that the US economy is in a no hope situation, and will be dragged down by higher energy costs, oil will correct downwards. During the August 2011 shock, oil fell from $100 to $75 high/low within a fortnight on the fear of slowing global growth.

One other thing to note is the SPR – the US fuel reserves which can be released at the will of the President to avoid shocks to the economy from oil price hikes. Obama exercised this last year and could do so at a moment’s notice.

Brent Crude is actually not just from the Brent field, but includes other North Sea production. The price for Brent is a standard, and the price for other types of oil is calculated with respect to that standard, being so much more or less. Two-thirds of world production is related to this standard, the other main standard being the US West Texas Intermediate (WTI).

The other problem that may be an issue for North Sea oil is the risk of leakage. There have been minor leaks, but the Deepwater Horizon spill in the US/Mexican Gulf of Mexico has brought fresh attention to the dangers. It is not possible to know whether there are going to be any more restrictions applied to the rigs because of this.

All these issues will impact the longer-term price, and announcements about them may be felt in the short term. There are many other short-term influences on oil prices, such as the politics of the countries from which oil is exported. Even while the North Sea can be regulated by European authorities, what is happening in the Middle East and in North and South America has an immediate effect on all the oil markets. If you choose to spread bet on crude oil, be careful to preserve your capital by setting stop losses.

IG Index quotes a daily spread betting contract on Nymex crude that has attracted a lot of interest from day traders. The firm also quotes a spread on the futures price.

Trader Opinion: Don’t overlook the powerful effect of the oil price cycle on the global economy. Oil is the absolute lifeblood of the world economy, and everything you pay for from a pack of gum to a holiday has an oil component in the price. Low oil price has the potential for stimulation far greater than quantitative easing if it falls far enough. Prices come down; folks suddenly have more disposable money and that is a huge stimulus.

The Brent Composite (BZ) is at $100 but if it falls back another 40 or 50% that would give a massive boost to reboot world economic growth. Imo, low oil price effect could outperform the drag caused by Europe on the US & Asia economies. Crude down to $80 looks probable and as the USA heads for oil self sufficiency an oil price back to $50-60 is not out of the question. I sometimes wonder how much of the oil price is due purely to speculation and what would happen to that speculation should oil supply absolutely crush demand, bearing in mind all the false talk about peak oil which is still around.

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