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One of the most actively traded commodities in the world is crude oil. It has a direct impact on international trade, economies and financial markets. Crude oil futures trading involves buying and selling crude oil futures contracts at a price fixed now for delivery at a future date. These future contracts help industries manage costs and hedge against market volatility and unpredictable price movements.
Crude oil trading in India is carried out on the Multi-Commodity Exchange (MCX), which is exclusively used for trading commodities like bullion, spices, natural resources, and crude oil.
Traders participating in crude oil futures trading are mainly protecting themselves against sharp price fluctuations in this sector. It lets traders hedge risks while allowing them to book profits from the price difference between the current price and the agreed future price. This crude oil asset class is critical to market liquidity, has a strong impact on several industries that are dependent on crude oil directly or indirectly, and even on currency exchange rates.
Key Takeaways
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Crude oil futures are contracts to buy or sell crude oil at a particular price on future date.
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These future contracts are exclusively traded on MCX (Multi-Commodity Exchange) and mainly used for hedging against price volatility and speculation.
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Traders must maintain a margin (a fraction of the contract value, decided by MCX/SEBI) to secure the contract and protect against price fluctuations.
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Though these future contracts offer portfolio diversification and leveraging profits, they also come with risks from high price volatilityand potential margin calls.
Understanding Crude Oil and Its Types
Crude oil is considered one of the most precious natural resources on the planet, which is processed to make fuels like jet fuel, diesel, and petrol. The value of crude oil is measured in two globally accepted benchmarks: West Texas Intermediate (WTI) and Brent Crude.
WTI Crude price denotes oil production in the United States of America and has a strong hold on the North American financial markets. The Brent Crude Price indicates oil produced from the North Sea. The Brent crude price heavily influences the financial markets of Asia, Europe, and Africa.
Fluctuations in Brent Crude price influence crude trades globally. Any changes between Brent and crude oil prices can impact worldwide oil refining costs, intercontinental supply chains, and even inflation. Brent and crude oil prices also have a direct impact on Indian fuel prices and financial markets.
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Crude Oil Production and Pricing
The leading producers of crude oil are the countries that make up the Organization of Petroleum Exporting Countries (OPEC), whose members include Saudi Arabia, Iran, Iraq, Kuwait, and Venezuela. However, fracking technology has enabled the USA to become the world's largest crude oil producer, reducing OPEC’s impact to some extent. There are also other large producers like Russia, China, and Canada.
Crude oil prices depend on a variety of factors and are quite volatile, but the main factors are supply and demand. OPEC is an oil cartel and changes production according to how oil prices behave. It may, for example, cut production if it feels that prices are too low. Since it accounts for a major share of petroleum exports, OPEC has a significant effect on oil prices, and oil experts take a close look at OPEC meetings to figure out future price trends.
On the demand side, crude oil prices also depend on the world economic situation. For example, if there is an economic slowdown in large oil-importing countries like China and India, demand will be less for crude oil. These two countries are among the largest consumers of crude oil after the US. Hence, any slowdown in demand in these two countries will lead to a steep fall in oil prices. Discoveries of new oil reserves could have the same effect, increasing supply and lowering costs.
In recent years, there has been a movement away from crude oil to cleaner sources of energy because of the climate crisis and global warming. However, crude oil and natural gas between them account for over 50 percent of world energy consumption, coal around 30 percent and renewable energy nearly 15 percent. So it will be a while before crude oil is deposed from its lofty but dirty throne.
Oil Futures and How to Trade in Them
Crude oil is what keeps the world economic engine growing. It is what is called a fossil fuel, formed by decaying organic matter millions of years ago and buried in the earth. Until the mid-19th century, the only source of fossil fuel was coal, until petroleum was discovered. Today, petroleum is the largest source of energy in the world, accounting for almost 40 percent of fossil energy. Although burning fossil fuel contributes to global warming, it continues to remain our primary source of energy. So much so that its popularity continues to increase trading in oil futures.
Crude Oil Futures
These futures are used extensively by countries as well as large corporations to hedge against price volatility. Prices of these can be higher or lower depending on how prices are expected to move. For instance, if there’s a feeling that oil prices will rise in the future, these will be priced higher than the spot markets. Similarly, if people feel that oil prices may fall, futures prices will be lower than spot prices.
These futures are essential because large quantities are involved. Most countries are dependent on oil imports. So if oil prices rise, they have to pay considerable amounts, putting a strain on their finances. To hedge against price rises, countries rely heavily on these. Speculators too take the opportunity to make money from price movements.
How Does Crude Oil Futures Trading Work?
Crude oil futures trading fundamentally means to sell crude oil futures contracts, where sellers sell crude oil at a predetermined rate and purchasers take delivery of crude oil on a specific date in the future at the same rate. In India, these futures contracts are traded on crude oil MCX, the commodity exchange of Indian financial markets.
To trade crude oil futures contracts, traders are mandated to deposit a margin, as decided by MCX or SEBI, of the traded contracts overall value. This binds the buyer and seller in a contract, even if the price fluctuates significantly from the agreed price. Futures contracts have a monthly cycle and expire at the end of each month. All crude oil futures contracts must settle before or on the day of expiry. For instance, the total trade value is ₹1,00,000; the trader must deposit a margin of ₹10,000.
Another advantage of trading in these futures is that lot sizes are pretty small. There are two lot sizes available for these: Crude Oil and Crude Oil Mini. While the lot size for Crude Oil is 100 barrels, the Crude Oil Mini size is 10 barrels. A barrel contains approximately 159 litres of oil. So assuming a spot price of $66 a barrel for Brent crude (this is spot price; futures prices could be higher or lower), and margin of 5 percent an ordinary investor gets exposure to a Mini oil contract for just around ₹225. The tick size is ₹1 per barrel.
Traders can hedge against sharp price movements, participate in speculative trading based on global cues, and diversify their portfolios through crude oil futures trading. Trading crude oil on MCX provides traders with a SEBI-regulated, transparent framework for selling futures contracts on commodities.
Trading in crude oil futures is a zero-sum game, not a win-win one. If you gain, someone else loses. It all depends on perceptions about the movement of oil prices. Since this is so unpredictable, no one can say for sure which direction they will move. So no two people will have the same perception. Whether you win or not will depend on whether your hunch was right.
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Factors Affecting Crude Oil Prices
A number of critical factors affecting crude oil prices: They are mainly global demand and supply, geopolitical conflicts, regulatory decisions by the Organization of the Petroleum Exporting Countries (OPEC), currency exchange rates, market speculation, and investor sentiments. When global demand exceeds the existing stockpile, the cost of Brent crude oil rises, leading to a surge in fuel prices worldwide.
Cross-border tensions and political unrest in oil-rich regions can also lead to OPEC cutting output, which directly impacts the cost of Brent crude oil to rise. Economic conditions such as inflation and bullion rates also have a strong impact on demand, financial market fluctuations leading to swings in short-term and long-term prices.
Crude oil is traded in U.S. dollars worldwide, hence any fluctuations in the dollar impact the crude petroleum price. The stronger the dollar, the cheaper the crude price. All these factors make crude oil one of the most important traded commodities in the world.
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How to Start Crude Oil Futures Trading in India?
The most crucial step for anyone interested in crude oil trading in India is to have a SEBI-regulated broker’s demat trading account that offers commodity trading on the Multi-Commodity Exchange. Traders will also be required to deposit money into their trading accounts that will be used as their margin for trading commodities.
Typically, brokers provide online crude oil trading dashboards where traders have real-time access to market data like price action, market momentum, and trading opportunities. Traders looking to book profits must have a good grasp of technical analysis, contract requirements, margin trading, and expiry dates, as these are essential to knowing how to trade crude oil profitably.
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Risks and Rewards of Crude Oil Trading
Like all commodities, crude oil trading also has its risks and rewards. Some prominent risks include geopolitical conflicts, price volatility, economic slowdown, currency fluctuations, and supply disruptions, to name a few. During times of sharp swings, these factors could lead to traders facing margin calls and heavy financial losses if stop-loss and other risk management systems are not in place.
Crude oil investment has its share of rewards that traders can reap. Global price movements give traders opportunities to book quick profits and leverage market movements. It also allows traders to hedge risks, diversify their portfolio, and leverage capital to maximise returns. To enjoy crude oil trading rewards, traders must have a strong trading strategy, all risk parameters in place, and take all decisions based on technical and fundamental analysis for high profits and minimal loss.
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Crude Oil Price Trends in India
The crude oil price charts are directly indicative of global trends as per the Brent and WTI benchmarks. In Indian financial markets, the Multi-Commodity Exchange, the MCX crude oil price fluctuates each day, mirroring worldwide supply-demand cues, currency movements, and geopolitical events. Tracking crude oil rates is vital for traders to speculate price movement, plan pricing strategies, and adapt to commodity market volatility.
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Conclusion
Understanding crude oil futures is vital for all traders in the commodity markets. Crude oil futures contracts are crucial for helping traders manage sharp price swings, book profits, and reflect global economic cues. The crude oil market is impacted by worldwide supply and demand, OPEC regulatory and policy changes, geographical conflicts, and crude oil output, making it critical for traders to monitor markets continuously. Monitoring global benchmarks, MCX movements, and market momentums allows traders to mitigate risks, align their trading strategies while adapting to global movements to book profits and manage risks.