Crude Oil Futures Trading

Crude oil, one of the most widely traded commodities in the country, plays a pivotal role in the economy. Its price volatility has far-reaching global impacts, influencing everything from fuel costs to economic stability. It is a very well-liked choice in the commodities market, particularly for day traders and those with long-term trading objectives. 

An additional benefit of the enormous quantities of crude oil trade is increased market liquidity. China and India are the two nations that use the most crude oil. However, what is trading in crude oil? We will learn  more about the crude oil futures meaning, it’s essential components, and other aspects of crude oil trading. 

What are Crude Oil Futures?

Crude oil futures are contracts for the future delivery of certain quantities of physical crude oil on a specified date arranged between buyers and sellers of oil. 

An oil futures contract is an agreement to purchase and sell a specific quantity of oil barrels at a fixed price on a prearranged date. When futures are purchased, a contract between the buyer and the seller is executed, and it is secured by a margin payment equal to 1% of the contract's entire value.

Customers purchase oil on the futures market to lock in a price, while investors buy futures to speculate on price changes. If their prediction is correct, they profit. Typically, they sell or roll over their futures contracts before the delivery date.

Crude oil futures offer individual investors an opportunity to participate in one of the world's most essential commodities markets. Crude oil futures can be used for speculating and hedging, and they are regarded as a crucial benchmark for the whole energy sector. It is one of the most widely utilised commodities for heating oil, diesel fuel and petrol. The geopolitical climate might affect the price of crude oil futures. CME Group has established micro and small crude oil futures contracts in the last few years. One-tenth the size of the conventional crude oil futures contract is occupied by the micro crude oil futures contract.

Participants in the oil market monitor the two leading oil contracts. West Texas Intermediate crude, traded on the New York Mercantile Exchange, is the benchmark for North American oil futures. The benchmark for trading on the International Exchange in Europe, Africa, and the Middle East is the North Sea Brent Crude. The front-month contract is the focus of most trade, as several futures contracts are available at once. It is recognised as the most active contract precisely for this reason.

Features of the Crude Oil Market

Crude oil exhibits longer trending fluctuations than other items and is a highly volatile commodity. However, the primary purpose of the crude oil trade, aside from that of corporations such as ONGC, IOC, and BPCL, is speculation rather than delivery.

Demand & Supply

The rules of supply and demand frequently impact the price of crude oil. Crude oil price fluctuations are influenced by storage capacity, production costs, and interest rates in decreasing order of importance. When there is an excess of crude oil and stable demand, the price of crude oil will increase.

Natural Disasters and Political Conflict

Political unrest or natural disasters can affect pricing and supply channels in key oil-producing regions, such as the Middle East.

US Dollar Value

The US is a significant player in the world's oil trade. Thus, the US dollar's worth has a considerable impact on the price of crude oil.

OPEC Announcement 

The Organisation of Petroleum Exporting Countries, or OPEC, is made up of all the world's leading oil-producing nations. In response to certain OPEC statements, price swings for crude oil may occur in the near term.

How Crude Oil Trading Works

• Brent Crude Oil and West Texas Intermediate are prominent entities in the oil trading industry. Both hold significant sway over global oil markets.
• Crude oil prices are notably volatile due to their nonrenewable nature. They are heavily impacted by supply and demand dynamics, and fluctuations are frequent and substantial.
• Many traders favour the turbulent trading environment it creates. The high volatility in oil prices offers opportunities for potentially lucrative trades.
• Trading options within Brent or WTI categories vary, encompassing a range of oil products. This includes Contracts for Difference (CFDs) on oil futures and the spot oil market.
• Understanding the oil market's characteristics is fundamental. Traders benefit by comprehending these nuances to devise effective and profitable trading strategies.

How to Trade in Crude Oil Futures in India?

In the crude oil spot market, there is less demand for immediate delivery than for future delivery. Oil transportation is complicated, so investors don't choose quick delivery. 

Therefore, future contracts are becoming increasingly common among end users and investors. A trader who signs a commodities futures contract is obligated to buy or sell a certain quantity of crude oil on a predetermined date. The transaction's cost is always predetermined.

Using certain instances, let's examine the energy commodity trade with 3 examples:

• Example 1
  Trading commodities may be advantageous when it comes to risk management and hedging. For example, you make money if you sell barrels of crude oil for Rs 500 each on the open market. You might lose money if the price of oil drops due to market changes.
  You can get into a futures contract with a buyer to safeguard yourself against losses brought on by abrupt price movements. It will guarantee that at a later time, you may sell crude oil for Rs 500 per barrel.
• Example 2
  Imagine a situation in which the crude oil market is unpredictable due to increased geopolitical tensions. As a trader, you are aware that an interruption in supply might drive up the price of oil. Anticipating additional price increases, you buy a futures contract for crude oil at Rs 2700 per barrel. The market then reacts to the anxiety, driving up the price of crude oil to Rs 3000 per barrel. Despite the market's volatility, your foresight allows you to benefit by Rs 300 a barrel, providing a significant return on your investment.
• Example 3
  Consider yourself a trader now who is keen to trade crude oil. The crude oil market may be optimistic, indicating that a further rise in price is possible. A single crude oil contract costs Rs 2500 per barrel and covers 100 barrels. To buy a futures contract, you do not need to pay the entire sum. Instead, you must pay a Rs 12,500 margin, or 5%.

Assume that the price of a barrel of crude oil increases to Rs 2600. As a result, you will profit by Rs 100 for each barrel and Rs 10,000 for just Rs 12500 in investment. Trading in crude oil offers incredibly high leverage. 

Benefits of Investing in Oil Futures

You should invest in oil futures for several reasons, and the following are some advantages you might anticipate:

• Changes in the price of oil eventually lead to opportunities for traders.
• Since oil continues to be a highly sought-after commodity, the shift away from fossil fuels still needs to be completed. This guarantees oil futures liquidity, preventing a scarcity of paper when it comes time to close contracts and preventing anybody from being left holding worthless paper.
• With just Rs.5,000 in capital, a margin account user may trade crude oil and buy Rs.1,000,000 in oil futures contracts.
• The futures environment is straightforward, with fewer moving parts than the stock market. Research helps develop a strategy to meet investing goals.
• Oil's value is expected to rise over time due to the surge in global demand for energy, plastics, and petroleum products. This demand will limit the supply, as oil is derived from ancient organic matter and is not produced in the lab. The law of supply and demand suggests this.

How to Buy and Sell Oil Futures?

Here are some of the ways you can use to buy or sell oil futures:

Buying Oil Futures Directly

Buying and selling oil futures directly with the commodities market is the first alternative. On the other hand, you might buy it from a licensed broker. However, purchasing futures is not the same as trading stocks, and to trade futures, you must have a specific account with a brokerage. The need to create an account to trade futures is defined by each broker. You will be able to place trade orders in the same manner as stocks and ETFs once you gain access to the futures trading market.

Buy and Sell ETFs

Investing in ETFs connected to oil is an option if you would rather have someone else handle the purchasing and selling of oil futures with little to no expenses.

Conclusion 
Crude oil is a widely known commodity for trading because it has high volatility and liquidity in financial assets. Traders might achieve knowledge by doing oil trades. Knowing the meaning of crude oil futures in the stock market can benefit investors looking to hedge their investments. Moreover, you have the option to use a stock market app. This will help you to improve your skills through various educational resources.