A tense five minutes as a novice gambles his money on oil
Speculators have been blamed for the recent surge in the price of oil. So what is it like being an oil trader? A complete novice, Simon Cox, used his own money to find out.
I didn't know where Cushing in Oklahoma was, but that was where $130,000 of my very own crude oil was to be delivered.
Many analysts and politicians blame speculators on the oil futures market for rapidly driving up the price in the last year. To find out how the futures market works and what makes it so attractive to speculators, I decided to become one.
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The Investigation is broadcast on BBC Radio 4 on Thursday 14 August at 2000 BST
I decided to use my own money - rather than BBC licence-fee payers - and Sucden brokers agreed to help me.
Chief executive Michael Overlander, who has a touch of the Alan Sugar about him, was extremely sceptical about my plan.
"If you wanted to find out about hanging you wouldn't go and put a noose around your neck and drop through a trapdoor," he says. "But if that's the way you want to get across your message, it's up to you."
I panicked for a moment and wondered how I'd tell my wife there was no holidays this year, or next
Normally Sucden would never allow someone to do a one-off trade but they had agreed as a way of showing me how the futures market works.
After passing their strict compliance procedures, I was ready to buy and I sat down in their London Bridge office with one of their veteran traders, Rob Montefusco.
The minimum order for crude oil is a thousand barrels, which worked out at around $130,000. Fine if you're Jonathan Ross, not if you're a radio freelancer.
But you only have to put up 10% of the purchase price and that is what makes oil futures so attractive to speculators. So I could buy almost $130,000 worth of oil for about £6,500. The rest is paid at the end of the month.
So if, for example, you bought oil at $100 a barrel, the minimum order would cost you $10,000. If the price went up by 10% and you sold straightaway, you would have doubled your money.
Mr Overlander had warned me my deposit could be wiped out in a matter of minutes. Even more scary was the fact that I could end up owing even more than my deposit if the price fell sharply.
After reaching $145, the price has dropped recently
The previous week, oil had been selling at around $147 a barrel. By the time I sat down in Sucden trading room it had dropped to around $128 and was continuing to fall.
After watching and waiting for an hour or so for the price to stabilise, I give Rob the nod and he buys a thousand barrels of crude oil at $127.13.
For a brief moment I felt like an oligarch and resisted the temptation to bid for an island or try and buy a football team.
But the omens aren't good - after an initial increase of 20 cents, the price continues to drop.
As I watched the price fall and saw my deposit being gobbled up in minutes I panicked for a moment and wondered how I'd tell my wife there was no holidays this year, or next.
For a brief moment I felt like an oligarch and resisted the temptation to bid for an island
Fortunately Robert had placed a stop on my trade, which meant if the price fell below a certain level I would automatically sell and limit my losses.
Good job too. Before I know it the price is almost at my stop price and at $126.58, I sell my thousand barrels of oil. Robert gets out his calculator to work out my losses: "That's $550 you have lost."
I was only in there for five minutes, but the kind of speculation I had been engaged in has undoubtedly had an effect on the recent surge in the price of oil. Exactly how much depends on who you ask. Some analysts say its $60 a barrel, others merely a few dollars.
The theory is that as big investment banks and pension funds have deserted shares, bonds and mortgage-backed securities, more money has been spent on commodities like oil, and pushed up the prices.
'Biggest bet ever'
David Kelly, chief market strategist for the investment bank JP Morgan is one of the analysts who believe it's this speculation that has caused the surge in prices.
"Over the last year we are seeing a speculative bubble in oil… this has really been the decade of the bubble. There has been a tech bubble, a real estate bubble and now we are seeing a commodity bubble and oil is at the vanguard of this bubble"
For me personally, I had lost my biggest bet ever. Think how many Grand National flutters you could have for £275.
But as Mr Overlander points out, it could have been worse.
"The market has been very kind to you, actually. If you'd bought it this morning and said I'm not going to put a stop on, you'd be down $5,000."
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