HomeGreater Than Icon
Knowledge BaseGreater Than Icon
DerivativesGreater Than Icon
Crude Oil Futures Trading in India

Crude Oil Futures Trading in India

Crude oil is one of the most traded commodities in the country due to its widespread demand. The global consequences of the volatility of crude oil prices are immense. In the commodities market, it is a very well-liked choice, 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? Read this article to learn about the definition, essential components, and other aspects of crude oil trading. 

What are Oil Futures Investing?

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

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

Customers who use oil make purchases on the futures market to fix a price; investors acquire the futures to take a chance at the actual price. If their prediction came true, they would benefit. Before they would have to accept the delivery, they would usually sell or roll over their futures holdings.

Participants in the oil market keep an eye on the two leading oil contracts. West Texas Intermediate crude, which is traded on the New York Mercantile Exchange, serves as the benchmark for oil futures in North America. 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 the majority of trade, as there are several futures contracts available at once. It is recognised as the most active contract precisely for this reason.

Start Your Stock Market
Journey Now!

50 Years Trust |₹0 AMC |₹0 Brokerage *

Table of Content

  1. What are Oil Futures Investing?
  2. Features of the Crude Oil Market
  3. How Crude Oil Trading Works
  4. How to Trade Crude Oil Futures in India?
  5. Benefits of Investing in Oil Futures
  6. How to Buy and Sell Oil Futures?

Features of the Crude Oil Market

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

  • Demand & Supply

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

  • Natural Disasters and Political Conflict

    Pricing and supply channels can be affected by any form of political unrest or natural disasters 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 significant impact on the price of crude oil.

  • OPEC Announcement

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

How Crude Oil Trading Works

  • Brent Crude Oil and West Texas Intermediate stand as the prominent entities in the oil trading industry. Both hold significant sway over global oil markets.
  • Crude oil prices are notably volatile due to the oil’s non-renewable nature, heavily impacted by supply and demand dynamics. Fluctuations are frequent and substantial.
  • The turbulent trading environment it creates is favored by many traders. 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 Crude Oil Futures in India?

There is less demand for immediate delivery than for future delivery in the crude oil spot market. Oil transportation is complicated thus investors don't choose quick delivery. 

Future contracts are, therefore, increasingly typical 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 an increase in geopolitical tensions. As a trader, you are aware that there might be an interruption in supply that drives up the price of oil. Anticipating additional price increases, you choose to 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 will be required to 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 opportunity 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 due to its high volatility and liquidity in financial assets. Traders might achieve knowledge by doing oil trade. Knowing the crude oil futures meaning in the stock market can be beneficial for investors looking to hedge their investments. To improve your abilities using a range of instructional materials, you may also access it through the stock market app. 

FAQs on Crude Oil Futures

One may find online crude oil pricing and other market news frequently at no cost. 

One of the most widely traded derivatives on the market is oil futures, which are also excellent investments. Leverage options, big volume trades, oil futures, and ease of entry might be your ticket to success.

Geopolitical events, supply and demand dynamics, economic data, OPEC decisions, and global oil inventories significantly impact crude oil futures prices.

Risks include price volatility, geopolitical uncertainties, supply disruptions, and leverage risks due to the amplified nature of futures contracts.

Various entities, including oil producers, refiners, speculators, hedge funds, and institutional investors participate in crude oil futures trading to hedge risks or seek profits.