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Trading the Oil Price

  1. Oil prices having been surging by a combination of supply shortages, rising geopolitical tensions over the Iraq war and Iran's nuclear programme and increasing investment/speculation in the commodity.
  2. 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.
  3. 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.
  4. In the short-term the price of oil is impacted by the release of weekly US oil inventory figures each Wednesday at 3.30pm, unexpected shortages of inventories can lead to a short burst in the price of oi.
  5. 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 this year. Today it is not unusual to see swings of 2 to 3 per cent in a day in the price of brent crude oil.
  6. 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.

Crude Oil Spread Betting

  1. Spread betting allows you to gain pure exposure to the oil price without the currency risk. And it also allows you to short the oil price...
  2. Most providers define a tick size as a 1c move per barrel and the minimum bet is typically £1 or £2 a point, with an initial margin requirement of 200 times the stake.
  3. Most spread betting providers quote prices for the two main oil futures contracts - US light sweet crude and Brent crude.
  4. 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.
  5. 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
  6. Be careful about buying oil on excessive strength (i.e. don't get caught up in the hype). Always try to buy on weakness.
  7. Crude Oil is very volatile 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.
  8. 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 more volatile than the FTSE and even the foreign exchange markets so it’s essential that you make use of stop losses.
Crude Oil Chart

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