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From a global perspective, crude oil is known to be one of the most essential commodities. Major oil-producing nations, oil corporations, traders, and consumers actively participate in the crude oil market. Moreover, it can also influence a country’s geopolitics, economy, and environment.
Global effects are vast regarding the price movements of crude oil. That’s why crude oil is a widely preferred option in commodity markets, regardless of whether one trades for the long term or the short term.
This article will discuss the definition of crude oil trading, how to begin trading crude oil in India, and the influential factors behind its price fluctuations. Let’s begin.
Also read: What is a commodity? A short guide before you trade
What is crude oil?
Crude oil is a non-renewable petroleum-based substance made up of deposits of hydrocarbons and other organic components. Living products upon being exposed to heat, pressure, dirt, sand, etc., transform into fossil fuels like crude oil.
What is crude oil trading, and how does it operate?
Trading crude oil involves trading contracts for F&O on various platforms, including online marketplaces, brokers, and exchanges. Speculators and arbitrageurs are just a few types of traders who use crude oil trading the most.
There are several varieties or “grades” of crude oil since the composition of the material may fluctuate significantly based on where it comes from. Understanding the characteristics of the oil market is thus crucial for traders to develop winning trading strategies.
Also read: Futures vs. Options: Differences every investor must know!
How to trade crude oil?
There is less demand for instant delivery than future delivery in the crude oil spot market. Investors don’t choose immediate delivery because of the difficulties of moving oil.
This is why most investors are more likely to enter into future contracts. With derivatives like CFDs (Contracts for differences), you can trade crude oil options to profit from price fluctuations rather than taking the physical delivery.
A trader who signs a commodity futures contract agrees to buy or sell a certain quantity of crude oil on a predetermined date. Here, every transaction has a predetermined cost.
The best way to understand the concept of commodity trading is through some examples.
Example 1: Trading commodities to hedge or manage risk
You buy crude oil for ₹700 per barrel, but the market price goes down to ₹650 in a day, meaning you lose money. Instead, you can enter a futures contract to buy it at ₹600 on a future date to hedge the risk of spending more.
Example 2: Trading commodities to profit or speculate
Now, imagine you are a trader who wants to buy and sell crude oil. Prices for crude oil may be going up because the market is bullish. There are 50 barrels in a cruise oil contract, each costing Rs 3,000. You don’t have to pay the total amount when you buy a futures contract, but rather pay Rs 7,500 or a margin of 5%,
Let’s say that a barrel of crude oil goes up to Rs 3,200. In this case, you will make Rs 200 for each barrel, for a total of Rs 10,000, after only investing Rs 7,500.
Also read:Option chain for smarter online trading
Crude oil futures trading on the MCX
The MCX offers the following kinds of crude oil contracts for trading:
- Crude Oil (Main): A price quote is provided per barrel. There are 100 barrels on the lot.
- Crude Oil (Mini): The quote is based on a price per barrel. There are only 10 barrels in the small crude oil lot size.
Crude oil mini’s small lot size guarantees that the required margin money is minimal. For this reason, investors prefer crude oil mini for a small crude oil futures lot size.
During the week, the MCX crude oil trading timing remains open from 9 a.m. to 11:30 p.m.
Price movements of crude oil: Influential factors
Supply and demand: The dynamics of supply and demand can influence crude oil prices. The quantity demanded, the cost of production, storage space, and interest rates all impact the price of crude oil.
OPEC remarks: The world’s biggest oil-producing states are members of the OPEC (Organisation of Petroleum Exporting Countries). OPEC policies and statements influence expectations among investors and cause short-term fluctuations in the price of crude oil.
The value of the USD: One of the major participants in the global crude oil trade is the US. As such, the dollar’s current value may influence the overall price of crude oil.
Oil prices are also affected by supply routes, political unrest, and natural calamities in oil-producing regions like the Middle East.
Conclusion
Trading crude oil is popular due to its liquidity and volatility. Successful oil traders use crude oil market research to create trading strategies. It has a special place in the global political and economic systems, making it a great investment opportunity in almost any market scenario.
FAQs
Crude oil is one of the most traded commodities on the Multi Commodity Exchange (MCX) in India. Traders can enter into crude oil trades through futures or options contracts through brokers registered on the MCX platform.
Crude oil is subject to high degrees of price fluctuations. Hence, the risk involved is high. However, the exchange offers hedging facilities like futures contracts to mitigate the risk of price changes. But crude oil trading offers the potential for great profits, too.
Crude oil trades on the commodity exchange from 9 AM to 11.30/11.55 PM every day. Crude oil is available on MCX from Monday to Saturday. The exchange is closed on Sundays and government holidays.
There are different kinds of crude oils like Brent crude oil, WTI (West Texas Intermediate) crude, Dubai crude oil and more. MCX in India trades in WTI crude oil, using New York Mercantile Exchange’s WTI as benchmark. WTI is sourced from Texas and one of the highest qualities of crude oil globally.