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Ask the expert
Which is the most popular commodity?
Peter McGuire, Commodity Warrants Australia
What is the most popular commodity to trade at the moment and why? What fundamentals drive this commodity, and how can I use warrants to make money out of future price moves?
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Today's expert: Peter McGuire, Commodity Warrants Australia
| The strong and sustained performance of crude oil has made it the most popular commodity to trade at the moment. Not only has crude oil risen 50% in the last 5-6 months (see fig 1.1), but it has risen 780% in the last 10 years and given the current demand, this trend is set to continue. The global crude oil market continues to experience high volatility as a result of political factors, global inflation, currency movements and supply regulation and limitations. These factors impact upon production and consumption and traders can use financial instruments such as warrants to capitalise on fluctuating market movements. Moreover, as market pundits predict crude oil trending upwards towards the $100 USD/ barrel mark we are seeing an increasing amount of traders using derivatives to take advantage of both this upward movement and also the corrections, whether small or large, that will naturally occur in any upward cycle.
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Figure 1.1 Crude Oil – Price History from 01/02/2007 | The global crude oil market is complex and there is no way that one can account for all factors influencing its movement in this reply, however, I’ll highlight the three fundamental factors that will most greatly affect price over the next few months.
The first is geopolitical issues. The Organisation of Petroleum Exporting Countries (OPEC) and international organisations in the energy sector have a significant influence over the supply of crude oil and therefore affect the global pricing structure. Dually, tensions in regions of high oil concentration have an equal effect on the supply of crude and place upward pressure on its price. For example, given the level of oil production capacity from the Middle East, current civil and international tensions have an impact great enough to significantly affect the global price of crude. Iran is the second largest producer of all OPEC countries and civil and political instability there is affecting market sentiment resulting in highly volatile price fluctuation, so you can see how geopolitical issues are a key driver of price fluctuation.
The second is the level of supply itself. As rapidly emerging economies such as Brazil, Russia, India and China (the BRIC economies) go from strength-to-strength, the level of demand is increasing to the point where supply levels are diminishing at accelerating rates. OPEC has in the past attempted to regulate supply to stabilise prices, however this has not proven to be overly effective and is overridden by strengthening demand.
The third is natural elements. As the hurricane season begins in the US, so does the speculation as to its effect on production and refining capacity in the region. Not only is there physical damage done to oil rigs and refineries which impact upon production but as analysts around the world speculate upon these effects there is a flow through of positive or negative trader sentiment to the wider market. We saw this situation transpire in the aftermath of hurricane Katrina in 2005. Crude oil spiked as the market accounted for the damage done to refineries and reduced production capacity.
This brings me to how you can use warrants to make money from trading crude oil. The factors above driving price sensitivity of crude oil make it an exciting commodity to trade for many investors – this is true for both the more sophisticated market players and the retail investor. As with most commodities, the price of crude oil is volatile and this opens up opportunities to make money in a rising or falling market. For example, there has been a general upward trend in the price of crude oil (see Fig. 1.2). However, no matter how bullish a market is it will experience corrections along the way. The key to successful trading is to understand the drivers and know when a commodity is set to rise or fall.
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Figure 1.2 Crude Oil – Price History from 01/01/2001 | After considering the factors that impact the price of a commodity, investors have the ability to opt for a bull or bear warrant. Bull warrants make money in a rising market and bear warrants will do so in falling markets.
Similar to CFDs, warrants are leveraged so profits are magnified. With leverage of course comes greater risk; however investors are only exposed to the initial amount of the warrant – there are no margin calls.
While the Australian economy is riding off the back of a commodity boom (which many predict will run for at least another decade), Warrants allow investors to gain direct exposure to the exciting global commodity markets and give investors the opportunity to make money from the inherent volatility of commodities such as crude oil.
Peter McGuire, Managing Director, Commodity Warrants Australia
Disclaimer:
The information in this article is general in nature and does not take into account any investor's particular objectives, financial situation or needs. In considering its appropriateness, investors should read the relevant product disclosure statement and consult a financial adviser before making an investment decision.
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