Commodity Trading Basics
by 5paisa Research Team Last Updated: 2023-06-05T17:22:22+05:30
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The global demand for crude oil makes it one of the top-traded commodities in the nation. The crude oil price volatility has massive implications all over the globe. It is an extremely popular option in the commodity market, especially among day traders or the ones with long-term trading goals. 
The high volumes of crude oil trading also offer greater liquidity in the market. The countries with the highest amount of crude oil consumption are India and China. But what is crude oil trading? Jump into this article to understand crude oil trading's meaning, key features, and more. 
 

What is Crude Oil?

Unrefined petroleum that occurs naturally is called crude oil. This fossil fuel contains organic materials and several hydrocarbon deposits. The popularity of crude oil trading can be attributed to the following reasons:

●    When crude oil is refined, it can lead to the production of high-demand fuels like kerosene, gasoline, and diesel. 
●    Crude oil can also be used for the production of plastic, steel, and fertilizers.
●    Due to its non-renewable nature, crude oil is available in a limited quantity and cannot be replaced once used. 
 

How Crude Oil Trading Works?

The oil trading market includes two major components: Brent Crude Oil and the West Texas Intermediate. Since crude oil is non-renewable, it is affected by supply and demand factors, which lead to significant price fluctuations. It creates volatile trading conditions that are preferred by most traders.
Within the Brent or WTI categories, you will come across several individual oil products to trade, like the oil futures market CFDs and the spot oil market. Every product has unique features and risks that traders should understand before investing in them. Every trader should be aware of the oil market dynamics to come up with strong strategies for profitable trading. 
 

Important Features of the Crude Oil Market

Crude oil is an extremely volatile commodity and displays longer trending movements than other products. But other than companies like BPCL, ONGC, and IOC, crude oil trading is primarily for speculation rather than delivery. Before actively trading crude oil, it's crucial to learn about the different factors that lead to price fluctuations in crude oil derivatives:

●    Crude Oil Supply and Demand: The price of crude oil is often affected by the laws of supply and demand. Storage capacity, production costs, and interest rates influence crude oil price movements in decreasing capacity. The price of crude oil will rise when there is an oversupply with steady demand. 
●    OPEC Announcements: OPEC, or the Organization of Petroleum Exporting Countries, includes all the major oil-producing countries across the globe. Certain OPEC announcements can lead to short-term changes in crude oil prices.
●    Political Turmoil and Natural Disasters: Any kind of political instability or natural calamities in major oil-producing areas like the Middle East can impact pricing and supply routes. 
●    The Value of the US Dollar: The US plays a huge role in global oil trading. Therefore, the value of the US dollar largely influences the price of crude oil. 
 

How to Trade in Crude Oil as a Commodity

In the crude oil spot market, the demand for immediate delivery is lower than for future delivery. Due to the complications of transporting oil, investors don't opt for immediate delivery. Therefore, future contracts are more common among investors and end-users.
When a trader enters into a commodity futures contract, they have to purchase or sell a specific amount of crude oil on a fixed date. The cost of the transaction is always pre-decided.

Let us understand the example of energy commodity trading with two examples.

Example 1

Commodity trading is often useful for the purpose of hedging or risk management. For instance, you sell crude oil barrels in the market for Rs 500 per barrel and gain profits. The oil price fluctuations in the market might lower its price and make you suffer a loss. 
If you want to protect yourself from losses due to sudden price changes, you can create a futures contract with a buyer. It will ensure that you are able to sell crude oil at Rs 500 per barrel on a future date. This concept is called hedging. 

Example 2

Now consider yourself a trader interested in crude oil trading. Maybe the crude oil market seems bullish, which means the prices are likely to rise in future. One cruise oil contract is 100 barrels and is priced at Rs 2500 per barrel. You are not required to pay the total amount to purchase a futures contract. Instead, you will have to pay a 5% margin of Rs 12,500.
Suppose the price of crude oil rises up to Rs 2600 per barrel. Therefore, you will earn a profit of Rs 100 for each barrel and gain a profit of Rs 10,000 by investing only Rs 12500. The leverage available for crude oil trading is extremely high. With future contracts, you can make profits despite a bearish oil market speculation. 
 

Crude Oil Contracts on the MCX

The types of crude oil contracts traded on the MCX are as follows:

●    Crude Oil (Main): The price quote is available per barrel. The lot includes 100 barrels.
●    Crude Oil (Mini): The price quote is calculated per barrel. The lot size is small, with 10 barrels.
The small lot size of crude oil mini ensures that the margin money necessary is low. Therefore, crude oil mini is more popular among investors. 
 

Can Retail Investors Go for Commodity Trading in Oil?

Retail investors can easily opt for commodity trading in oil. It demands minimal investment and enables investors to earn huge profits because of the high leverage. But crude oil futures are also highly volatile apart from being highly liquid. Therefore, crude oil price forecasting is extremely challenging. 
In the beginning, you should consult your broker for crude oil trading. Gradually, you can move on to trading on your own. 
 

Can I Trade in Crude Oil Using the 5paisa App?

The 5paisa app is your ultimate destination for crude oil trading. Install the app today and begin your commodity trading journey. 

Conclusion

The high liquidity and volatility of crude oil make it a highly preferred commodity for trading. Developing oil trading strategies depending on crude oil market analysis can enable traders to find success. You can also access different oil trading platforms to enhance your skills with a variety of educational resources. So start now! 

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