Oil Commodities Trading

Until recently, petroleum products trading was only open to an exclusive few, capable of delivering a minimum contract size of 1,000 barrels (with 42 gallons to a barrel). During the past few years however, changes have been occurring across the world to open the market up to the average investor.

Until the price blowout in the mid-70s, oil prices had remained stable for decades. Shortages, uncertainty and price rises began to occur amidst political and technological changes. Prices have since increased to over $70 per barrel and are expected to rise from mid-2006 to mid-2007 before declining slightly during the following two years.

Oil prices, like all commodities, cannot be predicted with guaranteed accuracy, but a reasonable projection is possible based on several large scale factors.

Demand continues to rise, and is likely to continue to do so in the foreseeable future. India and China are both experiencing substantial technological and cultural changes. India in particular is embracing more elements of a free-market economy than it ever has and the trend shows no signs of being reversed, or reversible.

India is being brought into the 21st century extremely quickly with the help of western technology and business methods. A demand for energy, primarily oil-based, comes with that, in order to build new homes, office buildings, manufacturing plants and more. Large areas of what was once a largely rural economy are seeing the effects. That leads to even more demand.

Of course, demand on it’s own isn’t enough. An individual can want anything. But India has an increasing ability to buy those goods. Having an inexpensive, highly educated work force, India is becoming the central focus for outsourcing for Information Technology, electronics manufacturing, communications and more. Expansion of those 21st century businesses is expected to continue for at least the next decade. Just as one indication, broadband adoption is growing rapidly in India.

With the second largest Internet population and the largest mobile phone use in the world is China. Increasing energy demands are expected to continue for the next decade at least. Though ostensibly ruled by the Communist Party, social forces are eroding its effectiveness. It is not possible to know whether repression will ease or increase, but with current technology, the flow of information is difficult to block even for a dictatorship.

Business is increasing in China as social changes begin to take effect. Along with this, energy demand is up. Constantly being built are new buildings, manufacturing plants and infrastructure, all of which require energy, primarily oil-based.

While demand is rising, supply rates have stagnated and are beginning to decline. Some refinery losses, such as that due to hurricanes, can be recovered within a year. However, other losses cannot be recovered. North Sea oil production peaked in 2000 and has been tapering off slowly. Substantial new sources are unlikely to be uncovered unless political changes occur and the position of the large known reserves in Alaska are released. It is not expected that any new sources will come online anywhere in the world.

Though not expected to be on the market for roughly a decade, technology is leaning more toward developing other forms of energy. Fuel-cell powered cars won’t be in anyone’s garages for many years yet, and they would only account for 7% of gasoline use anyway.

In the U.S., political pressures to forbid nuclear power are unlikely to change as there is still no solution available for the waste disposal problem.

As all these changes alter the oil landscape, new forms of oil trading mechanisms are be developed to allow the average investor to participate in this once-exclusive club.

The Chicago Mercantile Exchange now offers E-mini futures, which allow for trading contracts half the traditional size, 500 barrels. Futures and options on NYMEX (New York Mercantile Exchange), are now an option to all investors. While a standard 1,000 barrel size contract is still required, less than a 5% investment is needed for a futures contract. Also becoming more popular are commodities pools and funds (such as those from Pimco and Oppenheimer), which allow investing fractional amounts.

There has never been a better time for the average investor to look into oil commodity training, as the market currently favors low risk and steady/high profits.

         

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