Money: So where do you want this oil, mate?

You're a commodities trader. You've bought 1,000 barrels of North Sea crude. Why don't you have to take delivery? Stefan Bernstein explains

HOW MANY times have you seen it? Oil prices drop and the cost of petrol stays the same or even rises. The world's commodities are getting cheaper, but the average person doesn't benefit. Of course, when the reverse is true and oil prices are on the way up, pump prices are quick to follow suit. A lose-lose situation for the motorist.

Well here's a way that even small investors can fight back. With a little research and astute timing, you're profits could pay for all the fuel you'll ever need. And, along with the profits, you have the added advantage of feeling like a big-time investor without the financial backing of George Soros.

Call it commodities trading or dealing in futures, it still has a ring of mystery and excitement about it. It may simply be because so few people really understand what happens in the various dealing rooms and trading pits where chaos seems to reign, and those with the loudest voices and wildest gesticulations seem to come out on top. But the world's commodities markets are really nothing to be afraid of.

Whether it is the price of oil, some other physical commodity such as sugar or coffee, or an intangible such as a stock index, the commodities markets trade according to strict "contract" specifications. These contracts specify fixed delivery dates and standard nominal values so that all the players in the market understand what it is, exactly, they are agreeing to buy or sell. So, anyone with access to a broker can trade in commodities.

For example, you might be happy to trade in an oil contract, but you will want to know the quantity of oil involved, the delivery date, the price and its grade. All these features are set down in considerable detail by the various markets (such as LIFFE, the London International Financial Futures and Options Exchange), and this allows individuals to react quickly without ever having to think in depth about whether or not the "asset" in question is suitable. If someone buys a contract, then he is obliged to buy the asset on a particular date. If someone were to sell a commodities contract, then they would have to sell the particular assets in question on a particular date.

As always, an example is the easiest way of understand why anybody would do this.

Imagine you are a speculator and you think that the price of oil is about to rocket because of difficulties in the oil producing regions. You would probably buy a futures contract and would therefore be taking a "long position". Let's say the current futures prices of oil is pounds 100 per contract (for easy reckoning). If, during the life of the contract, the price of the contract itself should rise to, say, pounds 150, due to the perceived shortages actually becoming reality, then you would simply then sell your contract at pounds 150 having made a handsome 50 per cent profit. At the same time the price of oil company shares may rise, but it would be by a much smaller amount. The best you could hope for in the equities market would be 4- 5 per cent.

It is important to understand that when you buy a commodities or futures contract, the most you can actually lose is the total amount of your investment - pounds 100 in the above example if oil should become worthless. This is, of course, highly unlikely, and you should have the opportunity to follow the price down and salvage at least some of your money on the way out. The amount of profit you can make, however, is virtually unlimited.

You can also profit from falling prices. Imagine you hear that huge amounts of oil are about to be discovered in Antarctica and that this will halve the price. In this case, you can go out and sell the contract you bought in the previous example, for the same amount. You have now received pounds 100 but you are obliged to make delivery of the oil on the specified date. Of course, you know that oil will collapse in price, that you will be able to buy the contract to close out your position at pounds 25, and will therefore make pounds 75 profit.

The placing of an order in the commodities market is devastatingly simple once you have established a trading account. Imagine for example that you expect the price of oil to go down shortly. You will simply call your broker's trading desk and give your account number, asking to sell one June oil contract at the market. Your broker should hold for a few seconds before confirming that the deal has been done. This will be executed directly to the relevant trading floor at the relevant commodities exchange either by computer or by telephone. Your broker should then respond to the effect that you have sold one June oil contract at $YY per barrel.

If you take out a long position in some commodity and you choose not to close the position, or forget to do so, what happens? If you'd purchased six tonnes of Robusta coffee, would a couple of lorries appear in your road, and promptly tip out a mountain of beans on your drive, the day after the contract expires?

Well, before you arrange coffee mornings for the next 30 years, this will not happen. As your contract nears maturity, be it long or short, your brokerage firm will be keeping a wary eye on it. Some time before "delivery". the firm will telephone all open long position holders and tell them to either close their position or prepare to take full delivery and also pay the value of the underlying contract. Similarly holders of open short contracts will be asked to close out their trades or make ready to deliver the underlying commodity (and show they have the required quantity and quality available).

Even manufacturers and processing companies who trade with the commodity rarely take delivery of the underlying goods. This is because the commodity contracts are rarely in the exact quality or grade that they need.

Instead they will close their position, having successfully hedged against price movements, and buy in the cash market. The cash market price will have followed the commodity price throughout the period in question. Only those companies who trade in a commodity for which they can find buyers of many different grades tend to take physical delivery.

Stefan Bernstein's book `Understand Commodities in a Day' is available for pounds 6.95, post-free, from TTL, PO Box 200, Harrogate HG1 2YR. Or fax credit card details on 01423-526035 or email

Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
Arts and Entertainment
Kate Bush: 'I'm going to miss everyone so much'
Arts and Entertainment
Laura Wood, winner of the Montegrappa Scholastic Prize for New Children’s Writing

Children's bookseller wins The Independent's new author search

Arts and Entertainment
Pulling the strings: Spira Mirabilis

Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Neville's Island at Duke of York's theatre
musicReview: The production has been cleverly cast with a quartet of comic performers best known for the work on television
Arts and Entertainment
Banksy's 'The Girl with the Pierced Eardrum' in Bristol

Arts and Entertainment
Lynda Bellingham stars in her last Oxo advert with on-screen husband Michael Redfern

Arts and Entertainment
Hunger Games actress Jena Malone has been rumoured to be playing a female Robin in Batman v Superman

Arts and Entertainment
Tim Minchin portrait
For a no-holds-barred performer who is scathing about woolly thinking and oppressive religiosity, Tim Minchin is surprisingly gentle
Arts and Entertainment
Clara takes the lead in 'Flatline' while the Doctor remains in the Tardis
tvReview: The 'Impossible Girl' earns some companion stripes... but she’s still annoying in 'Dr Who, Flatline'
Arts and Entertainment
Joy Division photographed around Waterloo Road, Stockport, near Strawberry Studios. The band are Bernard Sumner (guitar and keyboards), Stephen Morris (drums and percussion), Ian Curtis (vocals and occasional guitar), Peter Hook (bass guitar and backing vocals).
Arts and Entertainment
Sean Harris in 'The Goob' film photocall, at the Venice International Film Festival 2014
filmThe Bafta-winner talks Hollywood, being branded a psycho, and how Streisand is his true inspiration
Arts and Entertainment
X Factor contestant Fleur East
tvReview: Some lacklustre performances - but the usual frontrunners continue to excel
Arts and Entertainment
Richard Tuttle's installation in the Turbine Hall at the Tate Modern
artAs two major London galleries put textiles in the spotlight, the poor relation of the creative world is getting recognition it deserves
Arts and Entertainment
Hunger Games actress Jena Malone has been rumoured to be playing a female Robin in Batman v Superman
Arts and Entertainment
On top of the world: Actress Cate Blanchett and author Richard Flanagan
artsRichard Flanagan's Man Booker win has put paid to the myth that antipodean artists lack culture
Arts and Entertainment
The Everyman, revamped by Haworth Tompkins
architectureIt beats strong shortlist that included the Shard, the Library of Birmingham, and the London Aquatics Centre
Arts and Entertainment
Justice is served: Robert Downey Jr, Vincent D’Onofrio, Jeremy Strong and Robert Duvall in ‘The Judge’


Arts and Entertainment
Clive Owen (centre) in 'The Knick'


Arts and Entertainment
J.K. Simmons , left, and Miles Teller in a scene from


Arts and Entertainment
Team Tenacity pitch their fetching solar powered, mobile phone charging, heated, flashy jacket
tvReview: No one was safe as Lord Sugar shook things up
Latest stories from i100
Have you tried new the Independent Digital Edition apps?

ES Rentals

    Independent Dating

    By clicking 'Search' you
    are agreeing to our
    Terms of Use.

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
    Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

    'Renée Zellweger's real crime was to age'

    The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
    From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

    Disney plans live-action remakes of animated classics

    From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
    Thousands of teenagers to visit battlefields of the First World War in new Government scheme

    Pupils to visit First World War battlefields

    A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
    The 10 best smartphone accessories

    Make the most of your mobile: 10 best smartphone accessories

    Try these add-ons for everything from secret charging to making sure you never lose your keys again
    Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

    Liverpool v Real Madrid

    Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
    West Indies tour of India: Hurricane set to sweep Windies into the shadows

    Hurricane set to sweep Windies into the shadows

    Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?