Crude Oil Trading

Crude oil trading involves buying and selling various types of oil and related assets to generate profit through market price fluctuations.
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Crude Oil Trading
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3 min
26-November-2024

Crude oil is considered one of the leading commodities for trading in India due to its constant global demand. Fluctuations in crude oil prices have significant impacts worldwide, making it a preferred choice for both day traders and long-term investors in commodity markets. Globally, India and China rank among the largest consumers of crude oil, further emphasising its importance in the market.

What is crude oil trading?

Firstly, let us understand what crude oil is. Crude oil is a natural resource existing in underground reservoirs. It is obtained through drilling processes.

In India, crude oil is used as the primary source of energy, with the country being heavily dependent on imports to meet its crude oil demand. Also, crude oil serves as a benchmark for pricing various petroleum products, such as:

  • Petrol
  • Diesel, and
  • Jet fuel

Two significant components of crude oil trading

  • Brent Crude Oil and
  • West Texas Intermediate (WTI)

Let us understand them better:

Brent Crude Oil West Texas Intermediate (WTI)
  • It comes from the North Sea, near the UK and is named after the Brent oil field.
  • This type of crude oil is widely used as a benchmark for pricing oil worldwide. 
  • So, when you hear about the price of oil in the news, it is often talking about Brent crude.
  • WTI crude oil comes from the United States, specifically from wells in Texas and nearby areas. 
  • It is also a popular benchmark for oil prices, especially in the Americas.
  • WTI is known for its high quality and purity compared to other types of crude oil.


Both Brent and WTI crude oils are actively traded in Indian commodity markets. Retail investors participate in crude oil trading via futures contracts.

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How to trade crude oil in India?

In India, crude oil trading is traded using commodity futures contracts on

  • Multi Commodity Exchange (MCX) or
  • The National Commodity and Derivatives Exchange (NCDEX)

Let us understand in simple steps how to trade crude oil in India:

Step I: Open a trading account

  • The first step is to open a trading account with a registered broker.
  • Make sure the broker allows commodity trading.

Step II: Choose a contract

  • Select a crude oil futures contract that suits your trading strategy and risk tolerance.
  • Contracts on MCX typically include:
    • Crude Oil Mini (10 barrels)
    • Crude Oil (100 barrels)
    • Brent Crude Oil (100 barrels)

Step III: Place orders

  • Upon choosing a contract, you can place buy or sell orders through your trading account.
  • To trade, you have to specify:
    • The quantity of crude oil contracts you want to trade.
    • Whether it's a buy (long) or sell (short) position.

Step IV: Close positions

  • When you are ready to exit your position, you can place an offsetting order.
  • This usually involves:
    • Selling if you initially bought the contracts or
    • Buying if you initially sold them

Step V: Settlement

  • At the end of the trading day, futures contracts are settled based on the prevailing market price.
  • Profit or loss from your trades will be credited or debited to your trading account accordingly.

What are the crude oil trading timings in India?

Crude oil trading happens from Monday to Saturday in two sessions:

  • Morning session - 10:00 AM to 11:30 AM and
  • Evening session - 5:00 PM to 11:30 PM

What are the various crude oil trading strategies?

Traders can employ various strategies such as

  • Swing trading
  • Buy-and-hold trading
  • Spread trading

Let us understand each of them individually:

1. Swing trading

  • It involves capturing short- to medium-term price movements in the market.
  • Traders aim to profit from the "swings" or fluctuations in crude oil prices over a few days to several weeks.
  • They use technical analysis to identify entry and exit points based on:

Example

A swing trader identifies a bullish trend in crude oil prices on the MCX. They buy a Crude Oil Mini contract at Rs. 4,500 per barrel. As the price rises to Rs. 4,800 per barrel within a week, the trader sells the contract. By doing so, they realised a profit of Rs. 300 per barrel.

2. Buy-and-hold trading

  • It involves purchasing crude oil contracts to hold them for an extended period, typically months to years.
  • All the short-term price fluctuations are ignored.
  • Traders base their decisions on fundamental analysis, such as:
    • Supply and demand
    • Geopolitical factors
    • Economic trends

Example

A buy-and-hold trader purchased a crude oil contract at Rs. 4,000 per barrel. They held it for several months. Over time, as demand rises and prices increase, the trader sells the contract at Rs. 6,000 per barrel.

3. Spread trading

  • It involves simultaneously buying and selling related crude oil contracts.
  • The primary goal is to profit from price differentials or spreads between them.
  • In practice, traders usually exploit spreads between:
    • Different crude oil grades (e.g., Brent vs. WTI) or
    • Different delivery months (e.g., near-month vs. far-month contracts).

Example

A spread trader observes that the price of Brent crude oil is trading at a premium to WTI crude oil on the MCX. They simultaneously sell a Brent crude oil contract at Rs. 5,200 per barrel and buy a WTI crude oil contract at Rs. 5,000 per barrel. As the price spread narrows, the trader closes the positions.

Conclusion

Crude oil trading involves trading Brent and WTI crude oil using commodity futures contracts on exchanges MCX and NCDEX. To gain maximum profits, traders use various strategies, such as swing trading, buy-and-hold trading, and spread trading.

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Frequently asked questions

How can I trade in crude oil?
You can trade crude oil through commodity futures contracts on platforms like the Multi Commodity Exchange (MCX). Open a trading account with a registered broker and select a contract that suits your trading strategy.
Is crude oil trading profitable?
Crude oil trading can be profitable for informed traders who practise risk management and stay informed about market developments. However, it also carries risks due to price volatility and external factors impacting oil prices.
Is there a margin requirement for crude oil trading?
Yes, trading crude oil involves margin requirements. These are established by the exchange. You can find the related provisions in SEBI Circular CIR/MRD/DP/54/2017 issued on June 13, 2017.
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