Today’s investing environment provides a wide variety of opportunities for smaller investors. Among them is the availability for smaller investors to participate in the oil futures market. This has come about due to the creation of the E-mini contract. E-minis are futures contracts that represent a fraction of the value of normal futures contracts. E-mini contracts are now available on a wide range of stock market indexes, commodities and currencies. Some E-mini contracts provide trading advantages, including high liquidity (and therefore tighter spread), greater affordability for individual investors due to lower margin requirements than the full-size contracts, and round-the-clock trading 23.25 hours a day from Sunday afternoon to Friday afternoon.
Trading Oil Futures for the Small Investor
For the savy investor, trading oil futures can be an attractive form of investment. This is due to the long-term increase in the price of oil, driven by increasing demand among both developed and developing nations.
The increased cost of extracting oil and the increasing demand for oil among the developing world is exerting an upward pressure on oil prices. These two factors combine to create a situation known as “peak oil” where the current demand outstrips supply, leading to an upward trend in oil prices. Even the exploitation of new oil fields is unlikely to eliminate this trend.
In 2010, China and other developing nations consumed more oil than the United States for the first time in history. This trend is set to accelerate as China’s economy continues to grow and inland development leads to greater use of fossil fuels. Additionally, the aftermath of the Fukushima disaster has resulted in an increase in Japan’s oil imports.
Given the absence of effective alternatives to fossil fuels, it is plain the long-term price of oil will continue to increase, no matter what short-term fluctuations are produced by the current economic instability.
New Opportunities for Trading Oil Futures
However, a major barrier for small investors has been the extensive up front expense in trading oil futures. But the creation of E-mini contracts has drastically changed the nature of the futures market, making it far more available to smaller investors. These new financial instruments allow the investor to purchase smaller oil futures contracts than traditional purchases allow, reducing his or her expense and risk.
Because of the greater flexibility of E-mini contracts, they are ideally suited to the small-scale individual investor. Especially for individuals interested in the greater profit potential found in oil futures as compared to oil stocks, these mechanisms provide an ideal tool to explore the markets while maximizing the investor’s liquidity.
Trading Oil Futures Contracts and the Cautious Investor
However, it should be noted that the futures markets are prone to experiencing a great deal of short-term volatility, which can be good or bad depending on whether the trend is for or against you. On the one hand it provides the opportunity to make money quickly but you can also lose it quickly as well.
The recent fall in oil prices due to the current economic instability in the Eurozone is one example of how external political and economic events can lead to sudden changes in the futures market. For risk adverse investors, investment in oil company stocks, rather than futures, remains the optimal strategy.
For those willing to accept the risk, E-mini contracts can result in a much higher return than stocks can, allowing the investor to make a substantial profit. The greater liquidity inherent in this type of transaction is especially beneficial for investors seeking a quick turn-around on their investment.
Like all investments, E-mini contracts require careful consideration. Potential investors should be certain that they are fully informed of the nature of these trading instruments, and are willing to accept the level of risk they represent. That being said, E-mini contracts are potentially a very profitable investment for the informed individual.
