How are Crude Oil rates decided?
The prices of commodities, including crude oil, are primarily determined by global demand and supply factors. Various industries use crude oil with their output determining the GDP for the country. If the demand is higher than the supply of crude oil, the crude oil price increases and vice versa.
These demand and supply factors are constantly changing as countries may need more or less crude oil depending on various internal factors. The oil futures market also influences the crude oil price, which is a binding agreement that gives the buyer the right to purchase crude oil at a predefined price on a predefined date in the future. The hedgers and speculators included in the futures markets set the price for the futures contract, which influences crude oil prices.
Furthermore, the price is also heavily determined by the market sentiment. If the hedgers and the speculators believe that the price is likely to increase in the future, they snap up the crude oil futures contract, which changes the crude oil price.
Lastly, the Organization of the Petroleum Exporting Countries (OPEC) can also determine the price of crude oil by setting production targets for its member countries, which are some of the countries that have the largest crude oil reserves. As OPEC manages the oil production of its member countries by setting crude oil production targets, it indirectly influences the price of crude oil.
What are the factors that influence the crude oil price?
As crude oil is used across sectors and industries, the crude oil price today/daily is influenced by numerous factors. These can be:
Demand: When investors search about crude oil prices today, the global demand for crude oil would be the influencing factor. The main drivers of the crude oil demand are the USA, Europe and China. The strength of these countries’ economies along with the demand from other countries such as India influence the crude oil price.
Supply: Crude oil is not produced by every country but is imported from countries that have large crude oil reserves. However, OPEC manages the supply of crude oil from such countries with large oil reserves to other countries. If the supply is lower in any country than the demand for crude oil or vice versa, it heavily influences the crude oil price.
Quality: The quality of oil also influences the crude oil price as it becomes the core for setting the price in the futures market and while importing crude oil from other countries. The higher the quality of crude oil, the easier it is to refine and meet set environmental requirements. Called “Sweet Crude”, the highest quality crude oil is higher than that of low-grade quality.
Derivatives Trading: Market participants buy and sell crude oil through futures and options and not physically. While hedgers use derivatives to hedge against a fall in crude oil prices, speculators use crude oil contracts to make profits based on the price fluctuations. These contracts also influence the crude oil price today/daily based on the trading volume.
What are the types of crude oil?
The classification of crude oil wasn’t transparent and created confusion for investors trading crude oil on exchanges such as MCX. For a better understanding of MCX crude oil price, the classification was changed to the following:
Class A: Light and Volatile Oils: Class A crude oil that trades in real-time includes refined crude oil and its high-quality and light products. Class A crude oil includes highly fluid oils that spread rapidly on water or solid surfaces, have a strong odour, are easily flammable, and have a high evaporation rate.
Class B: Non-sticky oils: Class B crude oil and its related products are oily and waxy and are less toxic than Class A crude oil. Class B oils adhere better to the water and solid surfaces than Class A oils. When subjected to high temperatures, Class B oils penetrate porous substances easily and also have heavy paraffin.
Class C: Heavy and Sticky Oils: Class C oils have characteristics such as sticky, tarry, brown or black and viscous. Oils included in this category have a similar density to water and tend to sink. These oils do not penetrate porous surfaces as easily as other types of oils included in Class A and B.
Class D: Nonfluid Oils: Class D oils are relatively non-toxic and are black or brown. Oils included in this category do not penetrate porous substances and can coat surfaces if melted. Heavy crude oils, residual oils, and some weathered oils fall in the Class D category.
How to Invest in Crude Oil?
The primary way to trade crude oil is electronically through a broker by opening a derivatives account. Commodities such as crude oil are listed and traded on the Multi Commodity Exchange (MCX), where the commodity is quoted based on the mcx crude oil price. They are traded through the means of a futures contract where you have the right to exercise the contract at a predefined date and a predefined price.
Crude oil is listed on the MCX based on the mcx crude oil price and is mostly traded in lots of 100 barrels and thereon. You can place an order for 100 barrels minimum and then in 200, 300, and 400 barrels from thereon. For placing an order to invest in crude oil, you have to log in to your derivatives account and navigate to MCX FO to buy and sell crude oil. Once you have placed an order, you will have to settle the futures contract before the stated expiry date.
You can also invest in crude oil through an Exchange Traded Fund. An oil Exchange Traded Fund will invest in companies that are associated with the mining, refining and production of crude oil. Furthermore, you can also invest individually in stocks of oil companies that are listed on the various stock exchanges, such as NSE or BSE.