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Oil is a hot topic on the City’s trading floors right now. Having peaked at $147/barrel just over a year ago, the price of crude oil dipped below $40/barrel only six months later. And now, having made a determined ascent for most of 2009, prices are still on the up. At the time of writing, oil has passed the $70/barrel level.

So, what’s the future for this volatile commodity? And how can you profit from these fluctuations in the price of oil?

Well, there are some good arguments for taking a long view on the price of crude.

While the world economy has been mired in the worst downturn in decades, production of commodities has been reduced in line with lower demand. This is particularly true of crude oil; as a price-stabilising measure, OPEC, the influential oil cartel, had cut production by 4.2 million barrels per day by the end of last year.

As and when the economy recovers and gains momentum in the short-term, demand may once again begin to outstrip supply and cause prices to rise. In the longer term, growth in China and India will also increase demand for commodities, driving up prices.

On the other hand, the global downturn was more than a blip and many economists predict that the shockwaves will be felt for a while to come. Rather than buying oil, those who subscribe to this more pessimistic view may see the recent gains in the price of crude as a good platform from which to short the commodity. Spread betting on oil can provide the ideal opportunity for those hoping to capitalise from a falling market, as financial spread betting offers down as well as up bets.

For those considering shorting a spread bet on oil, it is certainly worth remembering that the growing Asian economies have also been hit by the downturn and analysts are starting to question whether Chinese growth is more debt-fueled than previously thought, casting doubts on its ability to maintain current levels of progress. And if is it not met by sufficient demand, any increased production by OPEC will simply drive oil prices down again.

Spread betting is the easy, tax-efficient* way to profit from commodity markets and has the added benefit that you need never own (or take delivery of!) the commodity itself. When you spread bet, you can use Stop orders to limit the risk of large losses while keeping your potential profit uncapped.

The other major advantage of financial spread betting on oil is that you can go long or short – you can back your view on the market just as easily by ‘buying’ or ’selling’.

There is a lot more useful information on the Range of Markets page at IG Index. They are the UK’s leading financial spread betting provider, and have a section on taking a position on oil prices.

*Tax law can be changed or may differ depending on your personal circumstances.

However, spread betting is not suitable for everyone, so before starting make sure you fully understand the risks. IG Index can help you improve your knowledge of financial spread betting and the financial markets with a full education programme. TradeSense is a completely free six-week course and includes a 100-page guide to spread betting.

IG Index plc is authorised and regulated by the Financial Services Authority, FSA Register number 114059. For Binary Bets IG Index plc is licensed and regulated by the Gambling Commission. License number 066-002628-R-103649-002.

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