Have you looked at the oil market recently? No wonder Roman Abramovich can afford Chelsea and his own Airbus Superjumbo; just take a look at the chart below. Despite an increase in supply by OPEC, Brent Crude is tickling its all-time high, showing a 200% gain over the past 5 years.

But forget all those pictures of muscular men covered with squelchy, mucky stuff as they fight to cap a leaking oil pipe (unless there’s any female traders amongst us). The easiest way to trade oil is through Spread Betting; you need hardly any equipment and once you’ve placed your trade you’ve got time to do what old JR did best.

Crude oil is the world’s most actively traded commodity, and with good reason. Not much fall out here from the sub-prime, credit-crunchy, squeezy liquidity crisis.

OHLC CHART MONTHLY OIL

Back To The Classroom
But before we go anywhere we need to start with a brief science lesson; it’s important, honest guv.

Crude oil is the stuff that comes out of the ground. This is the basic, unprocessed product of dinosaurs and very old plants. This crude oil is then sent to finishing school, otherwise known as an oil refinery, where it gets distilled to produce a variety of products, ranging from petrol to heating gas to plastics.

The brief trip back to school was to help identify some of the miss-information banded around. There is often talk of oil shortages which isn’t always true. There is still plenty of the thick, black stuff squirting out of the ground, but not enough capacity at the refineries to convert it into petrol or industrial fuel. OPEC’s president recently opined that, “International oil markets have enough oil, but a lack of capacity to refine it was contributing to high prices.”

Oil is currently priced in dollars, but recently Iran and Venezuela followed Iraq’s lead and decided to sell their oil in exchange for Euros, putting pressure on OPEC to consider a change of currency. That is actually quite a big deal … but a blog for another day.

How To Trade Oil Without Getting Mucky
There are two contracts available, Brent Crude and West Texas Intermediate:

Brent Crude is the UK contract on oil sourced from the North Sea. And, hey! We might be crap at rugby, football, and cricket, but two thirds of the world’s internationally traded oil, from Europe, Africa and the Middle East, is priced relative to UK Brent Crude. So we’re the dog’s do-das at something.

In the big boys market Brent Crude is traded in London in something called Futures contracts, which are priced in US Dollars. Now, all you traders with enough balls and attention span to run your positions over a period of days or weeks, pay attention here.

Oil spread bets are monthly contracts. This means that
a) You don’t pay any rollover charges; the bet will run until the contract ends;
b) You do need to put a note on your Kylie Minogue calendar that the spread bet runs out (expires) on a definite date.
c) Now, get this. The spread bet runs out (contract expires) in the middle of the month before the month it says on the tin. So, for example, the Brent Crude October contract on paddypowertrader runs out (expires) on 13th September and the November contract finishes on the 12th October. How dumb is that? It smacks of interference from a country that already writes the date back to front.
d) The expiry date varies month by month so the best thing is to click on the icon to the far right of the spread bet to bring up the information box. This will tell you exactly when your bet finishes.

West Texas Intermediate is the US equivalent to Brent Crude. Commonly known as US Light Sweet Crude (or any derivation of these words). This one is traded in New York and again traded in monthly contracts, these run out towards the end of the month before the month on the tin so, as before, click icon.

Who Are The Big Swingers In Oil?
Of the 85 million barrels per day (bpd) produced, 42% comes from OPEC, 15% comes from countries of the former Soviet Union and the balance of 43% comes from non-OPEC sources like the US and Europe.

Organization of the Petroleum Exporting Countries (OPEC) is the international oil cartel, based in Vienna, whose aim is to try to balance supply and demand to get a fair (good) price for its members, but allow enough supply to prevent the industrialised world from seeking alternative sources of energy. Is it too cynical to suggest that, with oil reserves falling over the years, it’s in their interests to keep production tight and the price high?

OPEC members meet twice a year to set output quotas, but can meet in response to acute moves in price or supply of oil.

Not only is Saudi Arabia by far the biggest swinging dick, it also has the role of swing producer. (No, nothing to do with wild, camel swapping parties - it plays the role of smoothing production by cutting or increasing its own bpd to stabilize prices).

If you’re looking to trade oil place a diary note at least a week before any OPEC meeting as traders try and anticipate any quota announcements.

The Strategic Petroleum Reserve is the United States’ emergency oil stockpile, and it is the largest emergency petroleum supply in the world. The reserve stores about 570 million barrels of crude oil in underground salt caverns at four sites along the Gulf of Mexico. Any dipping into this reserve is going to be big news.

To Trade This You Need A Telly And A Weather Cock
Good news if you have the attention span of a goldfish; trading oil means watching lots of telly. Wu hoo!

However you won’t get rich watching the Playboy channel while repeats of Dallas on UK Gold might be good for motivation but not much else. Trading oil is very news orientated. Also you need proper news like global politics and tropical storms, not some soppy tart talking about how Fluffy the dog has just produced 17 genetically modified puppies.

Firstly, be aware of seasonal factors, the US Driving Season (apparently the land of the gas-guzzler has a particular season for driving, starting on Memorial Day at the end of May and finishing on Labour Day at the start of September) and cold winters when we all turn the heating up.

Moving up the excitement scale is the US Hurricane Season, which officially runs from 1st June to 30th November, but don’t expect the forces of nature to pay too much attention to the dates.

An average season has 11 named storms with six growing into hurricanes, but only two reach major hurricane status. So don’t go buying oil every time your weathercock spins round. Official thumbs in the air for 2007 predict 7-10 hurricanes, of which 3-5 could be the whole picnic hamper.

So why is the hurricane season so significant to the oil market in particular? Hurricanes tend to hit the Gulf of Mexico, which is filled to the rafters with oilrigs (over 20 rigs went missing due to Hurricane Katrina in 2005). This map is a bit out of date but gives some idea of why oil barons watch the weather forecast.

Next take a look at the world’s big oil producers. You won’t find oil gushing out of countries like Belgium, Holland or Sweden, where even mentioning their name is soporific. No, putting aside the comparatively stable USA and Saudi Arabia, God blessed the world’s nutters with the power and wealth of massive oil supplies. A short roll call includes Iraq, Iran, Libya, Nigeria, Venezuela and Russia, where a few well-chosen words from a president can send you sprinting to the ‘trade’ button.

And finally the most specific economic data to focus on are the US weekly oil and gas inventory figures, issued by the Energy Information Administration and released every week on Wednesday afternoons. If you trade oil you can’t afford to miss these.

Effect On The FTSE
In the days when Tony Blair was nothing but a twinkle in Geppetto’s eye equities reacted quite differently to rising oil prices. The old theory used to be that higher oil prices increased the costs of plastics, transport and even electricity, which wasn’t good. Higher petrol prices also added to inflation, which made interest rates go up, which also wasn’t good.

More recently a rise in oil prices has produced a rise in FTSE, due to the 20% weighting of Oil & Gas companies. The oil majors, Shell and BP, have pretty low costs of production and benefit as rising prices feed straight through to the profit column. So a rise in the oil price seems to be good for the FTSE index, if not for a lot of the companies in it.

Are you trading oil? If so let’s hear from you. What triggers do you watch and what’s your view, new highs or double top reversal? Let me know using the comments box below.