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Think gas prices will go higher? You can bet on it

WASHINGTON—You're seeing gas prices rise in the blink of an eye, and it seems a sure bet they'll go higher. That's why a major Internet sports-betting parlor began offering odds on rising gas prices this month, and why business is booming for traders who buy and sell oil contracts.

The volume of contracts for future delivery of crude oil set a record Thursday on the New York Mercantile Exchange (Nymex), and it seems everyone is gambling, hedging and trying to profit from rising fuel prices.

The price of crude oil went above $67 a barrel Friday, before retreating to close at $66.86. Traders expect this week to be equally volatile. Brace yourself for even higher pump prices, since there's a lag before gas prices catch up with crude-oil prices.

On Aug. 6, Pinnacle Sports, a large international Internet bookie headquartered on the Caribbean island of Curacao, began offering odds on future gasoline prices, allowing people who aren't high rollers to bet on fluctuating gas prices in a manner similar to how big institutional investors play the odds on the Nymex.

"This really is the man on the street. Many people read about the fluctuations ... these are the Joe Publics who are getting hit in the pocket with rising gas prices," said Simon Noble, the chief executive officer for Pinnacle UK.

Pinnacle officials won't disclose the number of gamblers who have wagered on U.S. gas prices but offer this comparison: Interest is about on par with betting on the recent Tour de France bicycle race.

Gamblers can wager on three propositions: Whether crude oil will top $70 a barrel by Jan. 1, whether the average price of gas in Los Angeles and New York will top $3.00 a gallon and whether a gallon of regular unleaded gas will exceed a nationwide average of $2.50.

Opponents of gambling view Pinnacle's activities as a vice, but they almost mirror what happens in the futures markets for oil. About 95 percent of the oil contracts trading hands on the Nymex are dubbed paper oil. They're bought and sold by people who never intend to take delivery.

The remaining contracts often are bought by oil-dependent companies such as airlines and refineries as a way of hedging against rising prices. Contracts are for delivery before the following month, so when they buy at $60 a barrel they do so expecting prices to rise even higher. If they guess right, they save money; if they guess wrong and oil prices are lower a month later, then they lose money.

A tremendous amount of trading on the Nymex comes from investors and speculators who want to take profits as oil prices continue climbing. In recent years, large pension-fund administrators and less regulated hedge funds have poured billions into the market for oil futures. And many savvy individual investors have hopped aboard Wall Street's commodity index funds and commodity hedge funds.

"That's how the average person is getting involved (in oil futures). You don't see the dentist from Des Moines buying 100 contracts," said Eric Bolling, an independent floor trader on the Nymex. "It's like buying shares in a mutual fund."

For those with greater appetite for speculation, the Nymex also offers an electronic auction of investment instruments that are a hedge against changes in the statistical data about U.S. crude-oil inventories released weekly by the Energy Information Administration, part of the Energy Department.

"This word hedge is just a euphemism for `Let's gamble,'" said John van Schaik, the editor of the New York trade newsletter Energy Intelligence Briefing.

The biggest difference between online gambling and the futures market is scale. An investor who buys a contract for future delivery of oil commits himself to purchasing either 1,000 barrels of oil or a mini-contract of 500 barrels. A barrel of oil is 42 gallons. At $66 a barrel, that's $66,000 for a single regular contract and $33,000 for the mini. Pinnacle's minimum online bet for gas prices is $1 and its maximum is $500.

On Thursday, the Nymex, the main trading place for oil, smashed a daily record for oil contracts. Some 383,599 contracts changed hands, surging past the previous record of 373,048 traded on April 13.

For AAA's daily fuel-price report and a state-by-state breakdown of gasoline prices, go to www.fuelgaugereport.com

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(c) 2005, Knight Ridder/Tribune Information Services.

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