Traders' views - Spread betting

Oil offers profitable trading opportunities

By , 03 Oct 2012

Recently, oil markets (US and Brent Crude) have become more short-term focused than long-term.

After a strong rise on speculation and news flow, the move has taken a breather. It could resume but also has the potential to correct. Where the price goes in the longer-term, however, is much less of a concern to short-term traders with volatility and trading opportunities looking likely for the foreseeable future, thanks to a constantly changing political and economic backdrop.

CFDs and spread betting allow traders to make (or lose) money based on the change in price of a barrel of oil (on a $ per point basis). Thanks to their embedded leverage, even a small change in price can result in significant gains (or losses) for traders. The fast changing world of commodities, especially one as globally important as oil, offers traders a great arena in which to trade, more so if one is able to identify and profit from the likely drivers of the next short-term move.

Multiple trading opportunities in oil

Over the past few weeks, the price of oil has been attractively volatile, offering multiple trading opportunities. This is, in part, thanks to the price of oil having so many macro-economic and geopolitical drivers. For instance, prices increased in anticipation of more quantitative easing (money printing) from the US Federal Reserve weakening the USD, making commodities cheaper, and providing a shot in the arm for economic growth (lower input costs).

The price of the black stuff (oil, not Guinness) has since fallen back (as they say, buy on rumour, sell on fact) on speculation of the US releasing petroleum reserves to ease US drivers’ pump bills (a key issue with US elections looming), and Saudi Arabia boosting production to counter lost supply linked to sanctions against Iran and other Middle Eastern geopolitical concerns (Libya).

A great recent example of oil price driving news flow was Israeli Prime Minister Benjamin Netanyahu’s 27 Sept speech at the UN General Assembly, which saw Israel retreat from an imminent strike on Iranian nuclear facilities, but nonetheless increase tensions with Tehran and heighten existing oil supply concerns.

With Middle East oil production already impacted by sanctions placed on Iran, removing around 1m barrels per day from the global market, this saw the Brent Crude oil shoot up on worries that the amount of already lost supply could grow. The up move was the biggest in eight weeks (+2.5% to $112.5) and followed a 9% fall from highs of $117.9/barrel in mid-September, which had followed a 33% rally from mid-June. Several big moves. From here will we rally back to recent highs, or trickle back down to recent lows?

Of course, this is nowhere near the price spike that would likely have occurred had Iranian retaliation disrupted oil transportation elsewhere in the region (notably in the Straits of Hormuz). Nonetheless, the likely result of current sanctions becoming long-term is that prices will ease as the production gap is filled by other producers.

There are also cases of companies flaunting sanctions. See recent news on Vitol, the world’s largest oil trader, ignoring Iranian sanctions, undermining western efforts to stop the flow of petrodollars back to Tehran’s suspected nuclear weapons programme.

..and not just in spreads but shares too

Don’t forget, while macro-economic and geopolitical news flow are key for the oil price, trading opportunities don’t have to stop at the price of a barrel. It is just as easy to trade the shares of the biggest oil producing names such as BP (BP.) and Royal Dutch Shell (RDSB), right down to the more junior players exploring and producing on a smaller scale listed anywhere from AIM, such as Gulf Keystone Petroleum (GKP) or Rockhopper Exploration (RKH), through to the FTSE 100's rising stars such as Xcite Energy (XEL) and Tullow Oil (TLW).

Warning: Remember, particularly if you are new to trading in the stock market and in forex, that the prices of shares and other investments can fall fast and you may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.

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