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Crude oil remains one of the most popular commodities to trade in India due to its high worldwide demand and economic significance. The International Energy Agency (IEA) predicts that India will be the epicentre of global oil demand growth by 2035, with crude oil demand increasing by 2 million barrels per day, the highest rate of any country. India's oil import reliance is expected to increase by over 92% by 2035, owing to increased industrialisation and automobile ownership. This positions India with China as one of the world's leading crude oil consumers.
Crude oil futures trading continues to be the most frequently traded commodity, thanks to large trading volumes on exchanges such as MCX and NSE. For those new to commodity futures trading, particularly crude oil, knowing market dynamics, trading methods, and risk management is critical for capitalising on opportunities in this volatile yet profitable market.
Key Takeaways
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Crude oil is one of the world's most extensively traded commodities due to its steady industrial demand.
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Crude oil prices fluctuate due to supply-demand dynamics, OPEC decisions, geopolitical risks, and currency movements.
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MCX crude oil futures are extensively used by Indian traders to speculate on or hedge against price changes.
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The MCX offers two crude oil contracts: the main contract (100 barrels) and the small contract (10 barrels).
Also, learn What is Commodity Trading here.
What is Crude Oil?
Crude oil is naturally-occurring unrefined petroleum. It is a fossil fuel which comprises organic materials and hydrocarbon deposits. There are two reasons the demand for crude oil keeps growing:
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By refining crude oil, one can produce products that are high in demand such as fuels like gasoline, kerosene, and diesel. It is also used to manufacture steel, plastics and fertilisers.
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Crude oil is a non-renewable fossil fuel. Hence, it is limited and cannot be replaced once used.
Also, learn the Difference between Equity and Commodity here.
Two Significant Components of Crude Oil Trading
The two most significant components of crude oil trading are Brent Crude Oil and West Texas Intermediate (WTI). Here are their key features:
|
Parameter |
Brent Crude Oil |
West Texas Intermediate (WTI) |
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Origin |
North Sea |
United States (mainly Texas) |
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Sulphur Content |
Slightly higher (heavier) |
Lower (lighter, sweeter) |
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Global Usage |
Benchmark for ~2/3 of global crude pricing |
Predominantly used as a US benchmark |
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Volatility |
Influenced by global geopolitics |
More affected by the US domestic supply and inventory data |
|
Preferred Market |
Europe, Asia, and global exporters |
North America |
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Price Influences |
OPEC+ decisions, shipping routes, geopolitical risks |
US shale output, storage levels, and domestic policies |
Also, check out Pros and Cons of Commodity Trading here.
Important Features of Crude Oil Market
Crude Oil is a highly volatile commodity and offers longer trending movements compared to other products. However, crude oil futures trading takes place mostly for speculation rather than delivery unless you own an oil company such as the IOC, ONGC, BPCL, etc.
In order to conduct commodity trading with oil prudently, it is important to familiarise oneself with certain features of the crude oil market that make it unique:
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Crude oil is considered to be one of the most actively traded commodities in the world. Since crude oil is essential for the manufacture of a number of products, any change in its price reflects on the prices of these products as well.
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Oil prices are likely to fluctuate at a much higher rate than most other commodities, thereby making the oil market a relatively volatile one. However, it is this volatility that opens up trading opportunities and makes it lucrative for day traders.
The prices of crude oil as a commodity are influenced by the following essential factors:
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Like any other commodity, the price of crude oil is affected by the laws of supply and demand. Production costs, storage capacity, and interest rates all affect crude oil prices in decreasing capacity. Recently, a rare combination of oversupply and consistent demand has increased the pressure on the cost of oil.
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OPEC announcements: The Organisation of Petroleum Exporting Countries, or OPEC, is an organisation made up of the largest oil-producing countries of the world. When OPEC makes certain announcements, it can alter investor expectations and result in short-term changes in crude oil.
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The value of the US Dollar: The US is one of the most important players in the global trading of crude oil. As a result, the overall value of crude oil is greatly impacted by the current value of the dollar.
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Political turmoil and natural disasters in oil-producing areas, such as the Middle East, as well as the oil supply routes, also impact pricing.
How to Trade in Oil as a Commodity
With crude oil, the demand for immediate delivery is smaller when compared to future delivery. The logistics of transporting oil are complicated. Hence, investors don’t intend to take on delivery if it is immediate. This is often why futures contracts are more common among end-users as well as investors.
By entering a commodity futures contract, a trader agrees to buy or sell a specific amount of crude oil for a pre-decided cost on a specific date. The concept of commodity trading can be best understood with an example.
Example 1 – Commodity trading for risk management or hedging
Assume that you are a farmer who grows wheat, and you sell your produce in the market at ₹ 500 per quintal, which fetches you a decent profit. You have thousands of tons of rice to sell, and you want to be sure that you don’t suffer a loss if the price of wheat comes down unexpectedly. To safeguard yourself from losses, you can enter into a futures contract (sell a futures contract) to sell the wheat at ₹ 500 per quintal at a future date. This is called hedging.
Example 2 – Commodity trading for speculation
Now, assume that you are a trader who is interested in crude oil futures trading. You are bullish on crude oil (meaning you think that crude oil prices will increase in the future). One contract of crude oil is 100 barrels, and it is priced at ₹ 2,50,000 (₹ 2,500 per barrel); but you don’t have to pay the entire amount to buy a futures contract. You have to pay a margin of 5% which comes at ₹ 12,500.
Imagine that crude oil prices increase to ₹ 2,550 per barrel. In that case, you earn a profit of ₹ 50 per barrel and make a total profit of ₹ 5,000 (₹ 50 x 100) by investing just ₹ 12,500. Therefore, commodity trading provides a lot of leverage to traders. 20x in this example.
One can also profit from falling global crude oil prices in the commodity market. For example, you sold an oil futures contract with a strike price at ₹ 4520 on Dec 1 and by December 30 oil prices fell from ₹ 4520 to 4420 per barrel. But you can still sell the futures at ₹ 4520 and make a profit of ₹ 100 per barrel which amounts to a net profit of ₹ 10 lakh (10,000 barrels x 100), assuming the deal was for 10,000 barrels.
In order to trade oil futures, a trader has to find the appropriate exchange for the desired oil benchmark.
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Oil benchmarks: The benchmark for crude oil is the reference point that determines standards for buyers and sellers of oil. On a global level, the most important oil benchmarks are the West Texas Intermediate (WTI), Brent Blend, and Dubai Crude.
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Exchanges: Oil futures in India are traded on the Multi Commodity Exchange, also known as MCX. On MCX, crude oil is one of the most highly traded commodities. On an average, Rs 3000 crores of oil, equivalent to 8500 barrels, is traded on the exchange daily. In FY19, crude oil accounted for nearly 32% of the MCX’s turnover, which was nearly ₹ 66 lakh crores.
Also, learn What is MCX here.
How to Trade in Crude Oil in India
Understanding how to trade in crude oil starts with knowing that most trading happens in futures contracts rather than physical delivery. Crude oil trading in India mainly takes place through futures contracts listed on the Multi-Commodity Exchange (MCX). Here’s a step-by-step guide:
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Open a trading account: Register with a broker allowed to trade commodities on the Multi-Commodity Exchange or the National Commodity and Derivatives Exchange.
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Select a contract: Choose a crude oil futures contract (mini or normal lot) that suits your risk tolerance and trading plan.
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Place your order: Decide whether to go long (buy) or short (sell), pick the contract size, and execute using your trading account.
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Close the Position: When your aim is met or your risk limitations are reached, offset the contract to maximise profits or minimise losses.
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Settle the trade: At expiry or when the position is closed, the futures contract is settled based on market price; profit or loss is credited/deducted.
Now that you understand the basics of trading crude oil in India, let's dive into the specific contracts available on MCX and their unique features.
Crude oil contracts on the MCX
More than ₹ 3,000 crore of crude oil futures trading takes place in the MCX every day. It is the most actively traded commodity on the exchanges.
Two types of crude oil contracts are traded on the MCX:
Crude oil (Main)
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Price quote: Per barrel
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Lot size: 100 barrels
Crude oil (Mini)
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Price quote: Per barrel
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Lot size: 10 barrels
Crude oil mini is more popular with traders because the lot size is less, hence the margin money required is also minimal.
Can retail investors go for commodity trading in oil
Definitely, it requires minimal investment and you have maximum opportunities to earn higher profits due to higher leverage. However, oil futures are not only highly liquid they are also highly volatile and it’s hard to foresee price movements.
If your broker offers commodity broking service and is affiliated with MCX or NCDEX, you can consult them for crude oil futures trading. Initially, it’s better to start with experts and gradually start trading on your own.
What are the Various Crude Oil Trading Strategies?
By choosing the right crude oil trading strategy aligned with their risk appetite and market view, traders can better navigate the volatility of crude oil. Key strategies include:
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Swing trading: It involves capturing short- to medium-term market fluctuations by finding support and resistance levels and employing momentum indicators to enter and exit. It is suited for more frequent trades based on technicals.
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Buy-and-Hold Trading: Take long-term positions in oil futures contracts, holding them for months or years, based on fundamentals such as global supply-demand and geopolitics. This strategy works for investors focused on long-term trends.
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Spread trading: It is the practice of trading the price disparity ("spread") between linked contracts, such as Brent vs WTI oil grades or contract expiration months. This strategy lets traders hedge or arbitrage between related crude contracts.
Conclusion
Crude oil trading persists as a popular choice among commodities market players because of its liquidity, worldwide importance, and potential for both short- and medium-term gains. Developing a disciplined strategy, examining market data, and staying up to speed on international happenings may help traders make better decisions and handle uncertainty.
