🚗 🚙 Turn your trusty old car into trustworthy journalism Learn more

E-minis open oil trading to small investors

Marketplace Staff Jun 20, 2006

KAI RYSSDAL: So here’s a conundrum. Oil is up by maybe 40 percent over the past year or so. You feel the hurt at the pump. The oil companies feely pretty good. Why not get some of what they’ve got? You could buy shares in an oil company. . . . Or, you could cut out the middle man. Go straight to the well, as it were. Brokerage firms and commodities exchanges are making it easier to invest directly in oil. But that doesn’t mean it’s not risky. Andrew Haeg explains.

ANDREW HAEG: Jeff Auger is a database developer, a political junkie, and generally a pretty curious guy. He likes to know how things work.

Lately he’s been thinking about oil and gas prices. Oil and war. Oil and global warming. But he realized that he knew next to nothing about oil beyond daily crude oil prices. How is it traded? How does the oil market work?

JEFF AUGER: If people were pumping Microsoft into their car, they’d be interested to know what Microsoft as a corporation does. And that’s the way I sort of thought about oil. I’m putting gasoline into my car at a pretty high price. But I was really alienated from how that trickles down to what the purchase price of gasoline is.

It was curiosity, and let’s be honest, dollar signs, that compelled Auger to invest in oil. Last month, he and a friend pooled $2,500 to buy what’s called an e-mini contract. The e-mini is a relatively new product from the New York Mercantile Exchange. It lets investors purchase a less expensive crude oil futures contract for fewer barrels.

The e-mini is one of a growing number of vehicles enabling average investors like Auger to take a stake directly in oil instead of in oil companies or mutual funds. The returns can be much greater.

Dan O’Neil is co-founder and principal of futures broker XpressTrade. The outfit has been around for several years, but only started offering e-minis this spring.

DAN O’NEIL: Just recently here in the past six to 12 months we’ve seen not only experienced and sophisticated traders who want to trade these markets, but we’ve also seen an influx of beginning futures traders too.

It’s not hard to understand why more people want to invest in oil. Reputable analysts are talking about peak oil, that the world’s supply of cheap oil is starting to decline. Meanwhile, China and India are guzzling more of it.

All of this has oil hovering at or near $70 a barrel, and it doesn’t take an energy analyst to see that it’ll go even higher.

SCOTT SHERIDAN: With the increase in price people are trying to figure out how they can get in on the game.

Scott Sheridan is an analyst for Think or Swim, an options and futures trading company. He says oil futures are not for the faint of heart. In a nutshell, investors bet that oil prices will rise or fall. They put down a fraction of the total contract value. But they can lose it all if the bet is wrong. For that reason, Sheridan recommends oil stocks or indexes over futures.

Scott Sheridan:

SCOTT SHERIDAN: Because the problem with a future is you can ultimately be right, but if you’re wrong for a short period of time you might get scared out of the marketplace.

But those with an appetite for risk and some fortitude find traditional investment vehicles too conservative. Joe Kim owns a stationery store in San Francisco. He’s trades oil futures on the side.

He’s reaped substantial returns over the past year, much more than the 11 percent he would have netted had he invested in Exxon. Still, Kim says, it’s been a harrowing ride.

JOE KIM: It’s like a manic depressive, where you get this extreme euphoria, but also there are times when you’re looking almost at this pool of darkness. But long as you know when to get out, you should be fine.

But isn’t that always the trick?

In St. Paul, I’m Andrew Haeg for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.