Since the introduction of electronic trading in 2003, India’s commodity trading market has grown by a mind boggling 120 times. Yet, we have only scratched the surface and commodity trading has tremendous potential of growth in our country.

Today, India’s own Multi Commodity Exchange (MCX) is the world’s largest exchange for silver. It ranks second in gold, copper and natural gas commodity trading and third in crude oil futures.

However, crude oil futures are the most actively traded commodity in the world and offer greater liquidity due to high volume of trade. If you want to learn how to do commodity trading in oil or crude oil futures trading, this beginner’s guide is the right place to start.

But first; what is commodity trading?

What is commodity trading?

Commodity trading is the trading of essential commodities with the objective of risk management or speculation. The concept of commodity trading can be best understood with an example.

Example 1 – Commodity trading for risk management or hedging

Assume that you are a farmer who grows wheat and you sell your produce in the market at Rs. 500 per quintal which fetches you a decent profit. You have thousands of tons of rice to sell and you want to be sure that you don’t suffer a loss if the price of wheat comes down unexpectedly. To safeguard yourself from losses, you can enter into a futures contract (buy a futures contract) to sell the wheat at Rs. 500 per quintal in a future date. This is called hedging.

Example 2 – Commodity trading for speculation

Now, assume that you are a trader who is interested in crude oil futures trading. You are bullish on crude oil (meaning you think that crude oil prices will increase in the future). One contract of crude oil is 100 barrels and it is priced at Rs. 2,50,000 (Rs. 2,500 per barrel); but you don’t have to pay the entire money to buy a futures contract. You have to pay a margin of 5% which comes at Rs. 12,500.

Imagine, that crude oil prices increases to Rs. 2,550 per barrel. In that case, you earn a profit of Rs. 50 per barrel and make a total profit of Rs. 5,000 (Rs. 50 x 100) by investing just Rs. 12,500. Therefore, commodity trading provides a lot of leverage to traders. 20x in this example.

One can also profit from falling global crude oil prices in the commodity market. Below is an example from NSE Derivatives.

In the above example, you can profit from falling oil prices by entering a futures contract to sell at a future date at a higher price. For example, you bought an oil futures contract on Dec 1 and by December 30 oil prices fell from Rs. 4520 to 4420 per barrel. But you can still sell the futures at Rs. 4520 and make a profit of Rs. 100 per barrel which amounts to a net profit of Rs. 10 lakh (10,000 barrels x 100).

How to do commodity trading in oil

Commodity oil futures work the same as the example provided above. However, crude oil futures trading takes place mostly for speculation rather than delivery unless you own an oil company such as the IOC, ONGC, BPCL, etc.

Before you learn about trading in oil as a commodity, keep in mind the following salient features of commodity oil futures. When you say oil, it’s crude oil not soybean oil or any other oil traded as a commodity in the MCX, NCDEX or other commodity exchanges.

  • – Crude oil is one of the most liquid commodities in the world because it is a source of fuel and energy for so many sectors.
  • – To succeed in commodity trading in oil, you must be able to understand how fluctuations in demand and supply impacts oil prices.
  • – Both technical and fundamental analysis can be applied for crude oil futures trading.
  • – You must have a trading strategy in place to avoid losses.

The oil market is bigger than all the metal markets combined

 

Crude oil contracts on the MCX

More than Rs. 3,000 crore of crude oil futures trading takes place in the MCX every day. It is the most actively traded commodity on the exchanges.

Two types of crude oil contracts are traded on the MCX:

  • – Crude oil (Main)
  • – Price quote: Per barrel
  • – Lot size: 100 barrels
  • – Expiry: 19thor 20th of every month
  • – Crude oil (Mini)
  • – Price quote: Per barrel
  • – Lot size: 10 barrels
  • – Expiry: 19thor 20th of every month

Crude oil mini is more popular with traders because the lot size is less, hence the margin money required is also minimal.

Can retail investors go for commodity trading in oil

Definitely, it requires minimal investment and you have maximum opportunities to earn higher profits due to higher leverage. However, oil futures are not only highly liquid they are also highly volatile and it’s hard to foresee price movements.

If your broker offers commodity broking service and is affiliated with MCX or NCDEX, you can consult them for crude oil futures trading. Initially, it’s better to start with experts and gradually start trading on your own.

Angel Broking also offers commodity trading services to traders on MCX and NCDEX. Start trading in oil derivatives with a free demat account that comes with zero annual maintenance charges and zero brokerage fees.