How to profit from a falling oil price

The oil price is now at its lowest level since last October. Spread betters can profit from any further drop. Here's how.

First off, the numbers. In New York West Texas intermediate crude is down to around $85 per barrel and Brent crude has slipped under the 'psychologically important' $100 mark to trade at $99. In May WTI lost 18% while Brent crude lost 15%.

The reason? Just look at the global economy. The eurozone is coming ever closer to crisis point, as Spain looks increasingly likely to need a bailout to keep its banks propped up. Meanwhile the latest US non-farm payrolls figure - the level of jobs growth in the US - disappointed, after the government had already lowered its estimate for first-quarter growth down to 1.9% from 2.2%. That will keep a lid on US demand. Meanwhile oil is not currently in short supply. US stockpiles are at a 22-year high for this time of the year.

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Track across to China and the bad news continues as Chinese manufacturing activity remains sluggish, exporters try to cope with weakening European demand and rumours swirl that Beijing may be considering a fresh stimulus. So no-one's expecting the Chinese to pick up the slack anytime soon.

In this environment, concerns about the Middle East in particular Iran and Syria are being subsumed by pessimism about world demand for the black stuff. So how can a spread better turn this to their advantage?

The obvious answer is a bet on the oil price. Via a spread betting firm you can place an up or perhaps more likely a down - bet on the price of Brent crude. For example, say your broker is offering a price of 9922-9928 on Brent crude. You place a downbet at 9922 at £2 per point (a $0.01, or 1 cent, move). The price then moves to 9822-9828. You can close out at 9828 and take out a profit of 94 points (9922-9828). At £2 per point that's a profit of £188.

Or how about a bet on specific sectors and stocks impacted by falling oil prices? For example, although I am not a big fan of airline stocks as a share investor, there's no doubt the falling oil price will cut their fuel costs and boost short-term profits. One stock I'd back for a rise is easyJet as I explain in this week's magazine (LINK).

As ever, a couple of bits of advice for novices keep your bet sizes low and use stop losses to control the damage should a bet backfire - you can rapidly lose a lot more than your initial stake with spread betting.