All you need to know about crude oil futures
Crude oil is one of the most traded commodities in the world. The world’s demand for energy means crude oil enjoys a rising demand from all countries. Since a few countries control the supply of crude oil, the dynamics of this market are completely different. The oligopoly situation with a few sellers and multiple buyers means that price controls depend on factors other than demand and supply. Geopolitical tensions inter country diplomatic relations and world trade relations have an impact on the prices of crude oil in the spot market.
When it comes to investing in crude oil, that is possible for an Indian trader through crude oil futures, crude oil exchange traded funds and oil marketing companies like BPCL, ONGC, GAIL which deal with petroleum products. However, in this guide, let us look at investing in crude oil futures.
Traders in the derivative markets know the different types of futures available for investment. The rules for investing in them are different. In the case of crude oil futures, since oil is a commodity, the trader will need a special commodities trading account to be opened since the exchange dealing with commodity derivatives is different. In India, Multi Commodity Exchange (MCX) and National Commodities Derivatives Exchange (NCDEX) are two commodity exchanges which allow for trade in commodities in the country. Once a special commodities demat account is opened, trades in oil futures is possible.
Crude oil futures are available for trade on MCX. The price of the crude oil future depends on the price of crude oil in the international market. Crude oil is sold in international markets in the form of barrels. The price of oil is per barrel which is 159 litres or 42 gallons. This is the price at which international shipments are made. There are two important crude oil benchmarks, the North Sea Brent Crude or Brent Crude and West Texas Intermediate or WTI Crude.
They are traded on MCX in Indian rupees. However, crude oil prices internationally are denominated in US dollars. Like all futures contracts, crude oil futures have a minimum lot size. The minimum lot size for crude oil futures is 100 barrels. However, it is possible to invest in Crude Oil Mini where the lot size is 10. These futures are highly liquid which makes it very easy for a person with small funds to make this investment.
Trading in oil futures requires a margin amount that needs to be put up front. However, since crude oil is highly liquid, the margin money amount is not very high. Some brokers demand a margin money of 5% of the amount of the trade. This allows a significant leverage for the investor. Each broker has a margin calculator which can be used to find out the margin on crude oil trades.
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