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Trading Peak Oil - The trade of a lifetime?

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Whilst all eyes have been on the oil price for the near month, the price of the furthest contract out (Dec 2012) has also been falling, much to my amazement. It is one thing for near month oil prices to fluctuate, in line with short term supply and demand, inventories and the gepolitical tides. But why on earth does the market believe oil will be hardly more expensive in Dec 2012 than it is now?

 

Surely, believers in peak oil and oil at $200 within the next 5 years must see this as the perfect trading opportunity. The Dec 2012 contract traded at around $62 today. I am very tempted to buy and let simmer for 6 years. Any views?

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The Dec 2012 contract traded at around $62 today. I am very tempted to buy and let simmer for 6 years. Any views?

 

This is interesting. How do you go about trading this contract. Surely, at some point between now and the next six years we will see oil at above $100 a barrel at least!

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First, go to http://www.nymex.com/lsco_fut_csf.aspx?product=CL to see all the available future contracts. The Dec 2012 contract is the last one. It's actually now up to $64.

 

To trade this, you need a "real" commodities broker (for example http://www.sucden.co.uk), not a spreadbetting company. Sucden will open a private client account from £5,000, and you will need that sort of money anyway as margin.

 

Then you just tell the dealer you want to trade this contract, NYMEX Light Sweet Crude Dec 2012. Trading hours are roughly between 14:00 and 18:00 UK time.

 

There will be an initial margin requirement of about $3500, plus any additional margin, should the price of oil fall by more than $3.50 from here.

 

The contract is worth the price quoted (e.g. $64) multiplied by 1000, so for example $64,000 if the price is $64. You do not have to pay the money now, only the margin needs to be paid and any additional margin, should the price of oil fall.

 

If in Dec 2012, oil is trading at $100, you sell the contract and you will receive the difference to the opening, being $36, i.e $36,000 wil be credited to your account. You can close the contract at any time, you do not have to wait until 2012. However, the contract may behave in a different way to the near month contract, so for example if the near month contract rises to $80 next year, that does not automatically mean that the Dec 2012 contract also rises to that level, because the market might believe that oil will fall back again by 2012. (If this happens, it is called backwardation). The closer we get to expiry, i.e. Dec 2012, the more the price of the contract will gravitate towards the near month price of oil.

 

The risk is that oil may not rise as expected, and fall instead. There are two issues. The first is that oil could eventually end up at say $100 in 2012, but in the meantime falls to, say, $30. That would result in a margin call, you would have to pay in about $30,000 of margin. If the price recovers by 2012, you get this money back. The second issue is that oil might not rise by 2012 at all, ending up, say, at $50. In that case you would close the contract at a loss and be debited with the difference, in this example, $14,000 (which would be taken out of the margin already paid). So you need to have the financial stamina to see the contract through to 2012, and oil will actually have to have gone up by 2012.

 

Any more questions?

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This is interesting. How do you go about trading this contract.

You really don't want to be trading the 2012 Futures contract. The furthest out contracts are much too 'thin' to trade. If the price goes against you, you want to be able to exit your trade sharpish, and the best way to do that is to trade only very heavily traded markets/contracts. Ordinarily, any Futures trades should be on the nearest contracts because they are the most heavily traded. Stick with them and you have a better chance of getting out in a panic sell-off. You will also get far quicker and more accurate 'fills'.

 

Every cent movement in one Crude Oil Future contract is worth $10. Using your $64.00 as an example price, if Crude drops to $59.00 you will have lost your $5000. However, in the event that you only have a $5000 account balance, your broker will exit your trade on your behalf if the price drops to $62.50 anyway(150cents X $10 = $1,500), because the maintenance margin on Crude Oil is $3450.

 

You will have more success if you learn how to trade Options, believe me. Trading Futures is difficult. For example, if you feel bullish it might be better to buy a Call Option. That way, the most money you can lose is the price of the Option. If you feel Bearish you can buy a Put Option instead. As of today, an 'at-the-money' December Crude Oil Call Option will cost you around $2000, and it will have 27 trading days before it expires. That means you will have another 27 trading days for your Call Option to trade 'in-the-money', ie, above your entry price, thereby giving you your profit ...and even if the price of Crude drops to zero, you will only lose your $2000 Option premium.

 

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You really don't want to be trading the 2012 Futures contract. The furthest out contracts are much too 'thin' to trade. If the price goes against you, you want to be able to exit your trade sharpish

 

The 2012 contract is not a trade that one would move in and out of, and I did not suggest that. It would be a long term trade, betting on oil prices being much higher in 2012 than now.

 

It is true though, to see this trade through to 2012, you would potentially need to stump up a lot of margin if oil falls significantly in the meantime.

 

There are no options on the 2012 contracts. However, NYMEX has a facility for OTC option contracts, so a good commodity broker might be able to find a counterparty for a 2012 call option.

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First, go to http://www.nymex.com/lsco_fut_csf.aspx?product=CL to see all the available future contracts. The Dec 2012 contract is the last one. It's actually now up to $64.

 

To trade this, you need a "real" commodities broker (for example http://www.sucden.co.uk), not a spreadbetting company. Sucden will open a private client account from £5,000, and you will need that sort of money anyway as margin.

 

Then you just tell the dealer you want to trade this contract, NYMEX Light Sweet Crude Dec 2012. Trading hours are roughly between 14:00 and 18:00 UK time.

 

There will be an initial margin requirement of about $3500, plus any additional margin, should the price of oil fall by more than $3.50 from here.

 

The contract is worth the price quoted (e.g. $64) multiplied by 1000, so for example $64,000 if the price is $64. You do not have to pay the money now, only the margin needs to be paid and any additional margin, should the price of oil fall.

 

If in Dec 2012, oil is trading at $100, you sell the contract and you will receive the difference to the opening, being $36, i.e $36,000 wil be credited to your account. You can close the contract at any time, you do not have to wait until 2012. However, the contract may behave in a different way to the near month contract, so for example if the near month contract rises to $80 next year, that does not automatically mean that the Dec 2012 contract also rises to that level, because the market might believe that oil will fall back again by 2012. (If this happens, it is called backwardation). The closer we get to expiry, i.e. Dec 2012, the more the price of the contract will gravitate towards the near month price of oil.

 

The risk is that oil may not rise as expected, and fall instead. There are two issues. The first is that oil could eventually end up at say $100 in 2012, but in the meantime falls to, say, $30. That would result in a margin call, you would have to pay in about $30,000 of margin. If the price recovers by 2012, you get this money back. The second issue is that oil might not rise by 2012 at all, ending up, say, at $50. In that case you would close the contract at a loss and be debited with the difference, in this example, $14,000 (which would be taken out of the margin already paid). So you need to have the financial stamina to see the contract through to 2012, and oil will actually have to have gone up by 2012.

 

Any more questions?

Cracking reply BP - really explains things to a noob like me.

Your efforts are greatly appreciated.

 

The 'margin call' element of the deal puts a whole different gloss on things.

Essentially, I can get 'called' at any point between now and 2012 if the price drops a lot, or the broker just needs some cash.... not a position that I could reasonably take at the moment.

Nonetheless - seems like a cracking offer.....maybe next time.

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before i would consider buying, i would want to see a chart of the 2012 contract

 

got one?

 

these guys : Soc.Gen : may have some charts and call options on long dates.

But you may need to register to get access to their charts and prices.

 

some companies (like phibro) made a fortune going long the longest-dated contracts,

but that was from levels of around $30

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One thought I had about this was to average in using mini futures which are a fraction of the contract. I don't know much about them but even I wouldn't mind buying 10K worth of oil for 2012 on the basis of it being a personal hedge. the margin element wouldn't keep me awake at night, could even pay the 10K upfront which I assume would cut the borrowing costs on the contract.

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There are no mini futures on this contract. The mini futures are only for the near months. In any event, the mini futures are still $500 per $, i.e. half the size of the main future.

 

There is no borrowing cost on a future contract. The cost of carry is included in the future price.

 

You can always ask your spread betting company if they will offer you a trade on a fraction of the main future. It does not cost to ask.

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after a rally, you cannot rule out a retest of the low.

 

the chart looks like it may do that to my eyes

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I'm interested to hear the arguments for and against oil @>$64 in 2012

 

Sure, peak oil is the obvious one.

But what about things like synthetic fuel production quenching demand?

Legislation, carbon emissions etc?

Discovery of a giant new field?

Scientific breakthrough?

War?

Global recession?

 

Things may change dramatically, is this trade far more risky than it seems?

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If spot oil continues to slide, the long-dated futures may get dragged down further.

 

I would be more comfortable buying after spot stabilises. The current slide is not done yet Imho

Having said this, I bought some canadian energy royalties in recent days

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