Crude oil is the most actively traded commodity on India’s Multi Commodity Exchange (MCX), with a daily futures contract value exceeding Rs. 3,000 crores. This means that there are about 8,500 barrels of crude oil traded each day on MCX.
At such volume levels, however, crude oil trading presents an attractive opportunity for traders.
However, many retail traders miss out on these opportunities due to the high risks involved in crude oil trading. To help traders overcome their fears, we will explain the basics of crude oil trading and reveal the best crude oil trading strategies in India.
Basics of Crude Oil Trading
Now the question comes, what is crude oil trading? Crude oil trading involves buying and selling crude oil to profit from price fluctuations. Futures, options, etc. are a number of ways through which traders can trade in this commodity. on changes in price or cover their risks.
There are two primary benchmarks that dominate the market: Brent and West Texas Intermediate (WTI).
- Brent Crude Oil: Brent oil is sourced from 15 different oil fields in the North Sea. It’s known as a “light and sweet” oil, though it’s not as light or sweet as WTI. Up to two-thirds of global oil contract trades involve Brent oil.
- WTI Crude Oil: WTI, short for West Texas Intermediate, comes from US oil fields, mainly in Texas, Louisiana, and North Dakota. It’s called “light sweet crude oil” because of its low density and low sulfur content, making it cheaper to produce and easier to refine compared to heavier or sour oils.
Crude oil is classified based on its density and sulfur content, such as “Light and sweet vs. Heavy and Sour”. “Light and sweet” crude oil has low density and low sulfur content, making it easier to refine into gasoline and diesel.
On the flip side, “heavy and sour” crude oil has high density and high sulfur content, requiring more processing to remove impurities. Now, let’s understand how crude oil trading works.
Also read: Complete Guide to Commodity Trading
How Crude Oil Trading Works
Crude oil trading in India primarily takes place through futures and options contracts on the Multi Commodity Exchange (MCX). These contracts allow traders to speculate on the price movements of crude oil without the need for physical delivery, as they are cash-settled. The standard contract size is 100 barrels, and the price is quoted per barrel in Indian Rupees.
In India, trading of crude oil is mainly done through exchanges such as the Multi Commodity Exchange (MCX) that enable traders to exchange various types of crude oils. Crude oil trading timings in India on the MCX platform occur from 9:00 AM to 11:30 PM (or 11:55 PM during US daylight saving time) from Monday to Friday.
Crude oil trading is influenced by various factors such as global supply and demand, geopolitical tensions, and economic indicators. Traders can leverage these contracts to hedge against price volatility or to profit from short-term price movements.
The trading margin is typically around 5%, and contracts usually expire as per the contract end date, which may fall around the 19th or 20th of each month.
Key Factors Influencing Oil Prices
Crude oil prices in India are influenced by many factors. Here are some most common reasons:
1. Global Supply and Demand
Global supply and demand dynamics play a crucial role in determining oil prices. When global oil production (supply) exceeds consumption (demand), prices tend to fall due to surplus.
On the other hand, when consumption outpaces production, prices rise as a result of scarcity. This balance is influenced by various factors, including economic growth, technological advancements, and geopolitical events, making it a key determinant of oil prices in India.
2. Geopolitical Tensions
Geopolitical tensions in oil-producing regions can significantly impact oil prices. Political instability, conflicts, or sanctions in key oil-producing countries can disrupt supply chains, leading to reduced oil availability and higher prices.
For instance, tensions in the Middle East, a major oil-producing region, often result in supply uncertainties, causing price volatility.
These geopolitical factors create a ripple effect, influencing global oil markets and, consequently, oil prices in India.
3. Currency Exchange Rates
Currency exchange rates, particularly between the Indian Rupee (INR) and the US Dollar (USD), play a significant role in determining oil prices in India. Since oil is traded globally in US dollars, any fluctuation in the exchange rate directly impacts the cost of oil imports.
A weaker INR against the USD makes oil more expensive for India, leading to higher domestic prices. Conversely, a stronger INR can reduce the cost of imports, potentially lowering oil prices in the country.
This exchange rate dynamic is a critical factor in the pricing of oil in India.
4. Government Policies
Government policies in India, such as taxes, subsidies, and regulations, have a direct impact on domestic oil prices.
For instance, high taxes on petroleum products can lead to increased prices for consumers, while subsidies can help lower costs. Additionally, regulatory measures, such as import restrictions or price controls, can influence the overall pricing structure.
These policies are often implemented to balance economic growth, inflation control, and energy security, making them a crucial factor in determining oil prices in India.
5. OPEC+ Decisions
The Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, play a crucial role in determining global oil prices by adjusting their production levels. When OPEC+ decides to cut production, it reduces the global oil supply, leading to higher prices.
On the other side, when they increase production, the supply rises, which can lower prices. These decisions are often influenced by various factors, including geopolitical considerations, economic conditions, and the need to balance the interests of oil-producing nations.
As a result, OPEC+ decisions have a significant impact on the global oil market and, consequently, on oil prices in India.
Trading Strategies for Crude Oil
Trading crude oil in India can be quite profitable if you use the right strategies. Here are some popular strategies you might find useful:
Buy and Hold Strategy
The buy-and-hold crude oil trading strategy involves purchasing crude oil futures or options contracts and holding onto them for an extended period, with the expectation that the price will increase over time.
This strategy is based on the belief that, despite short-term fluctuations, the long-term trend of crude oil prices will be upward due to factors such as increasing global demand and limited supply.
Traders look at supply and demand dynamics, including production levels, inventory data, and consumption trends. Economic indicators, such as GDP growth rates, inflation, and currency exchange rates, also play a crucial role.
By understanding these factors, traders can make informed decisions about the future direction of crude oil prices and identify potential trading opportunities.
Also read: What isthe Smart Money Concept?
Swing Trading Strategy
Swing Trading involves taking advantage of short- to medium-term price fluctuations to make profits. Traders using this strategy aim to buy crude oil contracts when they believe the price is at a temporary low and sell them when they think the price has reached a temporary high.
This approach requires careful analysis of market trends, technical indicators, and price patterns to identify potential entry and exit points. Swing traders often hold positions for several days to weeks, capitalizing on market volatility and price swings.
Common tools for swing trading include candlestick charts, moving averages, and relative strength index (RSI). By recognizing patterns such as head and shoulders, double tops, or support and resistance levels, traders aim to make informed decisions about when to buy or sell.
This strategy demands a keen understanding of market dynamics and the ability to act quickly on trading signals.
Spread Trading Strategy
This strategy involves simultaneously buying and selling two different crude oil contracts to profit from the price difference between them. This approach allows traders to hedge against market volatility by taking advantage of the relative price movements of the contracts.
For example, a trader might buy a contract for a near-term delivery and sell a contract for a later delivery, expecting the price difference between the two to widen or narrow. Such strategies also help with finding the best time for crude oil trading in India.
This strategy requires a deep understanding of market dynamics and the ability to analyze factors that might affect the price spread, such as seasonal demand, geopolitical events, and supply chain disruptions.
Scalping Strategy
The Fundamental Analysis Strategy focuses on understanding the main factors that affect oil prices. These include geopolitical events, supply and demand, and economic indicators.
Geopolitical events, like conflicts or deals between oil-producing countries, can directly impact oil supply. Supply and demand factors involve production rates, inventory levels, and how much oil is being used. Economic indicators, such as GDP growth, inflation, and currency values, are also important.
By analyzing these factors, traders can make informed decisions and spot potential trading opportunities.
Conclusion
Crude oil trading presents exciting opportunities, but it’s essential to grasp the market dynamics, employ effective strategies, and manage risks wisely. Consider starting small, continuously learning, and practicing with a demo account to build your confidence.
If you’re ready to explore this journey, Dhan can be a great partner to help you along the way. Open your Demat Account now!
