Without a doubt, the most commonly traded commodity in the world is crude oil. A vital resource for economies the world over, and an essential component in plastics, petrol and heating, commodities don’t come much more useful than oil, and as a result the demand for oil speculation is significant. For spread bettors, oil presents an opportunity to trade on the strength of this omnipresent commodity without Capital Gains Tax or the need for high levels of capital investment, opening up the market to a whole new plane of investors.
Why Spread Bet on Oil?
In order for a commodity to be of any value, its demand must outweigh the possible supply at any one time – a fundamental economic principle known as ‘scarcity’. Oxygen for example is not scarce, and therefore has no tangible resale value. Oil on the other hand is incredibly scarce, and it’s rapidly becoming even more scarce as worldwide reserves dry up.
For those spread betting on oil, and indeed those speculating on the oil market in various other ways, the advantages of trading oil lie in the basic notion that prices will over time continue to rise long-term.
Of course, oil prices are subject to significant fluctuations in pricing over the short-term, and are hugely responsive to supply, which is set by consortia of oil producing nations such as OPEC. As a result, oil is a volatile commodity, with a long-term rising value trend, making it an attractive option for spread bettors and other traders on which to base their trading.
Who Trades Brent Crude?
Oil is traded primarily by four different classifications of groups, as set out below.
1. Individuals and Private Speculators: The category into which most spread bettors will fall, oil is a particularly popular commodity with individual traders for a variety of reasons, including the transparency of oil pricing relative to supply and demand. If supply goes up, prices will fall – the oil market is a good example of supply and demand principles in actions, and as such it’s a relatively unadulterated market for traders with few price distortions.
2. Hedge Funds, Pension Funds and Institutions: It’s not just individuals that are trading in oil – hedge funds and the large institutional investors trade in and on the oil markets too, including through spread betting as a more tax efficient, leveraged alternative to physical trading. As a result, pensions funds worldwide hold billions in exposure to oil in some way or another, whether that’s notionally through spread betting or actually/potentially in the form of futures, options and other derivatives.
3. Governments: For slightly different reasons, governments around the world also stockpile oil as a means of contingency against problems in the supply chain. As an absolutely essential component to the movement of the economy, transport, heating, manufacturing, and a whole host of other vitals, governments worldwide hold stockpiles of oil in reserve, and thus help maintain a consistent demand for oil keeping prices high.
4. End Users/Manufacturers: Oil is also bought by manufacturers and end users, who rely on the supply of oil as a component part of their business. Manufacturers and end users are required to directly buy oil in order to refine and produce their goods, and as a result they have a vested personal interest in the pricing of oil on the commodities markets.
How To Trade Oil Effectively
Spread betting on oil is afforded by the volatile pricing of the commodity, and the constant triggers to supply and demand. Betting on oil effectively demands an understanding of how these triggers interrelate and factor in on the price of oil, to enable speculation on future prices off the back of economic and demand/supply indicators.
When trading on oil, look for key market drivers for price movements in either direction. Whenever OPEC meets, get ready to take on your positions. Or, on a more regular basis, when US oil inventory figures are released every Wednesday, prices can fluctuate wildly depending on the results. It’s also important to understand the logistics of oil supply. Many oil producing nations are particularly volatile politically an economically, and so understanding how current affairs is likely to impact on oil prices is also central to trading oil effectively.
With a defined spread trading strategy, and an understanding of the triggers that impact on supply and demand for oil, spread betting on the oil markets can be a great way to trade on this most prized of commodities.