As a commodity, crude oil holds significant importance for not just the global economy but for every individual household. The rise and fall of crude oil prices have wide-ranging implications around the world. That is why be it among day traders or traders for the long-term, crude oil is a popular option in commodity markets across the board.
With rising manufacturing demands in countries like India and China, crude oil has become even more significant. Even with the recent developments in renewable sources of energy, crude oil continues to be one of primary driving forces of the global economy.
Significance of the Oil Market
Crude oil is essentially a naturally occurring fossil fuel and a form of unrefined petroleum. As a commodity, it is valued highly due to it being a finite resource. Moreover, it is always in demand due to its wide range of uses as well as its role as a raw material for other products. Crude oil is used to produce petrol, diesel and is also used to manufacture steel, plastics and fertilizers.
Important Features of the Oil Market
In order to conduct commodity trading with oil prudently, it is important to familiarise oneself with certain features about the crude oil market that makes it unique:
- – Crude oil is considered to be one of the most actively traded commodities in the world. Since crude oil is essential for the manufacture of a number of products, any change in its price reflects on the prices of these products as well.
- – Oil prices are likely to fluctuate at a much higher rate than most other communities, thereby making the oil market a relatively volatile one.However, it is this volatility that opens up trading opportunities and makes it lucrative for day traders.
- – Apart from supply and demand, the prices of crude oil as a commodity are influenced by these two essential factors:
- OPEC announcements:The Organisation of Petroleum Exporting Countries, or OPEC, is an organization made up of the largest oil producing countries of the world. When the OPEC makes certain announcements, they can alter investor expectations and result in short-term changes in crude oil.
- The value of US Dollar: The US is one of the most important players in the global trading of crude oil. As a result, the overall value of crude oil is greatly impacted by the current value of the dollar.
How to Trade in Oil as a Commodity
The most common and popular method of commodity trading with oil is by the means of oil futures contracts. With a commodity futures contract, a trader can enter into an agreement to buy or sell a specific amount of a commodity (crude oil in this case) on a specific date in the future at an agreed upon price. Importers and exporters utilise futures to protect their demand against the volatility of oil prices. But traders can use futures to speculate on oil prices without having to purchase or sell the crude oil themselves.
In order to trade oil futures, a trader has to find the appropriate exchange for the desired oil benchmark.
- – Oil benchmarks: The benchmark for crude oil is the reference point that determines standards for buyers and sellers of oil. On a global level, the most important oil benchmarks are the West Texas Intermediate(WTI), Brent Blend, and Dubai Crude.
- – Exchanges: Oil futures in India are traded on the Multi Commodity Exchange, also known as MCX. On MCX, crude oilis one of the most highly traded commodities. On an average, Rs 3000 crores of oil, equivalent to 8500 barrels, is traded on the exchange daily. In FY19, crude oil accounted for nearly 32% of the MCX’s turnover, which was nearly Rs. 66 lakh crores .
Commodity trading in India is on the rise, with crude oil leading the way. With its volatility in pricing, commodity trading with oil offers a variety of opportunities for all forms of traders. However, being on the wrong side of this volatility can lead to a loss in investment. Therefore, it is recommended for potential traders to seek the services of a broker. This can maximise the value of the investment and minimise the risks associated with trading in oil.