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Best Way to Short Oil

With so many people so bullish about oil, it might be a good time to think about shorting it.

After all, at close to $100 a barrel, the price of crude has nearly doubled this year without a significant pullback.

There are plenty of people, like Fadel Gheit, managing director of oil and gas research at New York financial services firm Oppenheimer & Co., who will tell you oil prices have nothing to do with fundamentals . "Current fundamentals don't support $60, let alone $90," he says. "Demand hasn't increased significantly. What's changed in the world this year?"

Even some people who think current prices are justified are looking for a technical correction. Phil Flynn, senior energy market analyst at Chicago's Alaron Trading, thinks oil's rally has been driven by fundamental reasons, like a weak dollar, an unseasonal decline in inventories and an increase demand for oil in India and China.

Still, he thinks the market is due for a 10% to 15% pullback.

The traditional way to trade oil is through a futures account. But going short via the futures market is expensive -- and risky. Chances are, your stock broker doesn't trade them and you'll have to pony up a sizeable amount of money to open up a new account with a new firm.

Exchange-traded products that track oil are an alternative worth considering. There are now five of them, and, in theory, they should all be as easy to sell short as stocks, borrowing the shares and selling them in the hopes of buying them back at a cheaper price when it's time to repay the loan.

But as I wrote here in August, it's not as easy to short exchange-traded products as you might think. While all of these products are relatively new, four are relatively thinly traded, meaning they may be hard to borrow.
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