Crude oil is regarded as one of the most precious things to trade in India due to its constant global demand. The increase and decrease in crude oil prices have extensive global repercussions. Crude oil is, therefore, a popular option in all commodity markets, whether among day traders or long-term investors. India and China are indeed the world’s largest customers of crude oil. As per International Energy Agency’s (IEA) annual fuel report, India’s crude oil demand will surpass China’s by 2024.
Crude oil futures are among the most vigorously traded commodities worldwide, and their high trade volume provides better liquidity. This ultimate beginners’ guide is the best way to start if you wish to understand how to engage in oil commodity trading or crude oil futures trading.
Crude oil is a naturally found crude petroleum product processed into gasoline, diesel, heating oil, and many other petrochemicals. Black gold is a frequent nickname for crude oil.
You are direct or indirect users of crude oil, the petrochemicals used in laptops and desktop computers to the oil utilized in pharmaceuticals, recreational sports equipment, cosmetics, and even tea. Therefore, crude oil is essential to our existence.
Middle Eastern nations hold 48 percent of their oil reserves. About 40% of the world’s oil production is controlled by the Organisation of Petroleum Exporting Countries (OPEC). OPEC has thirteen members, including founders Iran, Kuwait, Iraq, Saudi Arabia, and Venezuela.
Crude oil comes in three varieties:
Crude oil is a highly volatile commodity with longer trending swings than other commodities. Unless you control an oil corporation such as the IOC, BPCL, ONGC, etc., crude oil futures trading is primarily conducted for speculation rather than delivery.
To facilitate oil commodity dealing with prudence, it is necessary to familiarize oneself with the distinctive characteristics of the crude oil market:
Crude oil is regarded as one of the world’s most frequently traded commodities. Due to the necessity of Crude Oil in the production of a variety of goods, any variation in its price also affects the prices of these goods.
Oil prices are expected to move significantly higher than prices in most markets, rendering the oil market extremely unstable. Nonetheless, this volatility creates market opportunities and makes day trading profitable.
The following fundamental features influence the prices of crude oil as a commodity:
Crude oil is amongst the most liquid commodities on the market, meaning it can be traded in enormous amounts, and significant data is available for analysis. To fully comprehend the oil market and produce accurate predictions, traders are necessary to conduct independent studies, combining technical and fundamental analysis. This will provide insight into market patterns and aid in acquiring knowledge about the asset.
For instance, fundamental analysis can be used to evaluate the worth of oil by analyzing business financial statements, oil trading news announcements, and the regional economic stability you are dealing with. For instance, if an oil spill or production decrease is reported in the news, this will influence the price of oil and its trade businesses, which must be accounted for in your trading plan. Therefore, this analysis is deemed fundamental.
Technical analysis, typically the second phase of a process, entails examining price charts, graphs, and technical indicators to derive numeric data. Nevertheless, both tactics are required for oil trading, even as commodities are very volatile, and a broad perspective is advantageous.
Demand for expedited crude oil shipping is lower than demand for future delivery. In addition, the logistics of delivering oil are complex. Thus investors want to avoid accepting quick delivery. This is why futures contracts are becoming increasingly popular among end-users and investors.
Example 1 – trading in commodities for risk management or hedging
Suppose you are a farmer who farms wheat and sells it for Rs. 500 per quintal on the market, yielding a respectable profit. However, you possess hundreds of tons of rice to sell, and you wish to avoid incurring a loss if the price of wheat abruptly drops. Therefore, to protect against losses, you can get into a futures contract (purchase a futures contract) to sell wheat at Rs. 500 per quintal later. This is known as hedging.
Example 2 – trading commodities for speculation
Assume that you are a trader engaged in crude oil futures trading. You are positive about crude oil (meaning you plan that crude oil prices will rise in the future). Each crude oil contract consists of 100 barrels and costs Rs. 2,50,000 (Rs. 2,500 per barrel); however, you do not need to pay the total amount to purchase a futures contract. Instead, you must pay a 5% margin of Rs. 12,500.
Imagine that the price of crude oil per barrel climbs to Rs. 2,550. In this example, you gain a profit of Rs. 50 per barrel and Rs. 5,000 (Rs. 50 x 100) on a total investment of Rs. 12,500. Consequently, commodities trading gives traders a great deal of leverage. Twenty times in this case.
One may profit from decreasing global crude oil prices just on commodity markets. For instance, you purchased an oil futures contract with a strike of Rs. 4520 to 4420 per barrel. On December 1, and by December 30, oil prices had fallen from Rs. However, you could still sell these futures for Rs. 4520 to 4420 per barrel.
A trader must discover the proper exchange for the appropriate oil benchmark to trade oil futures.
Crude oil benchmark: The benchmark for crude oil is the critical reference point that defines the criteria for oil sellers and buyers. Brent Blend, West Texas Intermediate (WTI), and Dubai Crude are the most significant global oil benchmarks.
Exchanges: Oil futures were traded in India on the Multi Commodity Exchange, popularly known as MCX. Crude oil is among the most frequently traded commodities on MCX. On the median, Rs 3000 crores, or 8500 barrels, of oil are traded daily on the exchange. In FY19, crude oil accounted for roughly 32% of MCX’s nearly Rs. 66 lakh crores in revenue.
Indeed, it involves a small investment, and you have the most significant potential to produce greater income due to greater leverage. Nonetheless, oil futures are very liquid and highly volatile, making it challenging to anticipate price swings.
If your broker provides commodities brokerage services and is linked with MCX or NCDEX, you can approach them regarding crude oil futures trading. Usually, it is preferable to work with specialists before gradually transitioning to trading by yourself.
Steps to gain profit on crude oil trading
Listed below are the five steps to consistently make money in the markets.
The price of crude oil fluctuations is based on perceptions of supply and demand, which are influenced by global output and economic growth. Oversupply and declining demand motivate traders to sell crude oil markets while rising demand and dropping or flat output motivate traders to bid crude oil prices upward.
The energy futures markets are dominated by high-frequency traders and hedgers, with industry participants taking positions to offset physical exposure and hedge funds speculating on long- and short-term trends. As a result, retail investors and traders have less of an impact on this market than on more emotionally charged markets, such as precious metals or high beta growth companies.
Small players are enticed into these markets with the front headlines and table-pounding political pundits, which increases the retail sector’s power when crude oil trends significantly upward. The ensuing waves of greed and terror can amplify the velocity of the underlying trend, leading to unprecedented peaks and troughs with huge volumes.
Oil corporations’ production, exploration, and oil service operations and sector funds offer diversified industrial exposure, including production, discovery, and oil service operations exhibiting distinct trends and possibilities. As a result, even though most corporations reflect overall crude oil patterns, they might differ significantly for extended periods. Frequently, these counter wings happen when equity markets are strong, with rallies or declines prompting cross-market linkage that encourages lockstep behavior among varied sectors.
What are the benefits of crude oil trading?
Investment in crude oil has various advantages over regular stocks for specific types of investors. First, you can diversify your portfolio through oil trading depending on your investment objectives. How? Including oil commodities in an equity-only or fixed-income portfolio can reduce overall volatility because the types of investments are uncorrelated.
Consequently, commodities such as oil are excellent for balancing price fluctuations in a conventional portfolio. Because commodities have currency-independent intrinsic qualities, they retain their worth during inflation. Given the consistent and dependable global consumption of crude oil, investing in oil futures and options is a means to profit from the fluctuating oil prices immediately.
Indeed, numerous large institutional investors purchase oil-related investments for their endowments and pension funds. This is because crude oil demand might always continue, irrespective of supply variations. Using oil ETFs and futures contracts, it is feasible for professional traders with a high-risk threshold to generate significant profits with little capital outlays.
Here are the four most effective crude oil trading techniques:
The massive trading volume that floods the crude oil market can give traders bizarre trading chances. Having a commodities trading plan is crucial because no crude oil trading advice can replace the essential commodity market trading expertise.
With this trading guide, traders can profit from erratic crude oil price fluctuations.
When trading oil funds using natural gas, Brent, or WTI, remember this in mind. The trading market is riddled with large sharks who want to steal your money. Therefore you must exercise extreme self-control.