Apart from gold, the other most volatile and unpredictable trading commodity has to be the ‘commodities trading superstar’ – “Crude Oil”.
Crude oil is the most actively traded commodities contract in India with futures contract value of more than Rs. 3,000 crores on MCX daily. This means that around 8,500 barrels of crude oil is traded daily on MCX.
With such high volume, trading in crude oil has maximum profit potential for traders and investors.
Unfortunately, most retail investors fail to take advantage of crude oil’s profit potential simply because of the high risk involved in trading crude oil.
To help investors overcome their fear of crude oil trading, we will decode the basics of crude oil trading. We will also reveal the best crude oil trading strategies in India.
In this article:
- What is crude oil?
- What is crude oil trading?
- Crude Oil Contracts
- Strategies & Tips for Crude Oil Trading
What is Crude Oil?
Crude Oil is a naturally occurring, a raw petroleum product which is refined to produce gasoline, heating oil, diesel and many other petrochemicals. Crude oil is popularly known as ‘Black Gold’.
Directly or indirectly, we are all consumers of crude oil. From petrochemicals being used in Laptops, PCs, to the oil used in medicines, recreational sports items, cosmetics and even tea. Crude oil is an important part of our lives.
48% of crude oil reserves are in middle eastern countries. The Organisation of Petroleum Exporting Countries or OPEC controls almost 40% of the world’s crude oil production. OPEC has 13 countries as members, with Iran, Iraq, Kuwait, Saudi Arabia and Venezuela as founding members.
There are three types of Crude oil:
- Brent Crude
- West Texas Intermediate (WTI crude)
What is Crude Oil trading?
Crude oil trading refers to buying and selling crude oil futures and options. Crude oil is actively traded on the MCX. Crude oil trading is all about speculating on short-term price movements and analysing the real value of crude oil.
Basics of crude oil trading contracts in India
On MCX, crude oil is quoted on a per-barrel basis. Some of the other key crude oil trading contract details are: follows –
- Price Quote – Per barrel
- 1 Barrels = 159 litres
- Lot size – 100 barrels
- Tick Size – Rs.1 (Tick size is the minimum price change between the different bid and offer prices)
- P&L per tick – Rs.100
- Each contract lasts for 6 months
- Expiry – 19/20th of every month
- Delivery units – 50,000 barrels
- Physical Delivery – Mumbai / JNPT Port
Refer to the MCX Bhavcopy to know commodity futures prices and expiry dates of each commodity.
Practical Example of Crude Oil Futures Contract – January 2021
The above snapshot is a real example of a crude oil futures contract for January 2021. You can ascertain the following from the above example:
- The crude oil contract, expiring on 19th Jan 2021 is currently trading at Rs 3673/- per barrel.
- The lot size of crude oil is 100 barrels. So, the value of 1 futures contract will be: Lot size * price = 100 * 3,673 = Rs. 3,67,300/-
Margin in crude oil trading
Margin is similar to a security deposit. A margin allows you to buy the full contract by paying only a small amount upfront. Compared to other commodities, the trading margin on crude oil is higher.
For example: If you wish to carry an overnight position, then the margin requirement is 50%.
This means, 1 lot of crude oil (100 barrels) requires a margin deposit of 50% * Rs 3,67,300 = Rs. 1,83,650
Refer to Samco’s commodity trading calculator for more details.
Strategies & Tips for Crude Oil Trading
Here are the four top crude oil trading strategies.
1. ‘Buy and Hold’ Trading Strategy
In crude oil trading, a ‘buy and hold’ is probably the best and most widely used trading strategy. Traders analyze demand and supply factors and take calculated positions. If their prediction comes true, traders close their position to book profits way before expiry.
2. Technical Analysis Trading Strategy
Crude oil traders base their investment decisions on technical indicators such as candlesticks, bar charts and the volume of trading. These technical indicators help traders predict crude oil’s future price movement. Technical analysis in crude oil trading helps traders analyse the right time to buy and sell as per the formed candle.
3. Swing Trading Strategy
Swing trading strategy involves buying and holding a commodity for a short time period. It can range from a few minutes to three or four days. Crude oil swing traders rely on short-term changes in supply and demand, technical analysis and candlestick charts to determine the market’s trend.
Swing traders buy a futures contract if the market is trending up and sell if the market trends down. Crude oil swing traders aim to earn profits from small movements caused by volatility. Swing trading is very risky, and crude oil traders can lose money quickly if the market unexpectedly moves against their desired trend.
4. Spread Trading Strategy
Spread trading involves buying crude oil futures contract in one month and selling another crude oil futures contract in a further month. The purpose is to profit from the expected change between the buying and selling price of both the contracts.
[Suggested reading: Online Commodity Trading in India]
Crude oil prices are highly volatile. Apart from demand and supply factors, they are also influenced by geopolitical tensions. Hence, it’s important to build a solid trading strategy before trading in crude oil.
Once you have a solid trading strategy in place, then you can trade in the commodities market by opening the best commodity trading account in India with Samco.
[Recommended reading: 5 Best Commodities to Trade and Become Rich in 2021]
What is Commodity Trading?
History of Commodity Trading in India
Advantages & Disadvantages of Commodity Trading
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What is Commodity Futures Trading?
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Tips & Rules for Commodity Trading