Commodity trading in India, at present, offers over 120 different products to choose from. As trading in commodities is a high-risk exchange, based on your selection, you may earn profits or undergo losses. Ever wondered which is the best commodity for trading in India?
Which is the Best Commodity For Trading In India?
The answer: Crude Oil. Crude oil is heralded as the one of the top commodities to trade in India as it is perpetually in global demand. India and China are the biggest consumers of crude oil all over the world. According to an annual fuel report by the International Energy Agency (IEA), India’s demand for crude oil has remained robust in 2019, and its demand is forecasted to equal China’s by 2024.
What is Crude Oil?
Crude oil is naturally-occurring unrefined petroleum. It is a fossil fuel which comprises of organic materials and hydrocarbon deposits. One of the reasons crude oil is the best commodity for trading in India is that its demand is ever-increasing. There are two reasons the demand for crude oil keeps growing:
- – By refining crude oil, one can produce products that are high in demand such as petrochemicals like gasoline, kerosene, and diesel.
- – Crude oilis a non-renewable fossil fuel. Hence, it is limited and cannot be replaced once used.
How Often is Crude Oil Traded?
Crude Oil is a highly volatile commodity and offers longer trending movements compared to other products. It is traded in Multi Commodity Exchange (MCX). On MCX, crude oil is usually one of the top commodities to trade in, often occupying the first spot among the most active shares on MCX for the day. In 2019 alone, crude oil accounted for approximately 32% of the MCX’s turnover, which amounted to nearly Rs. 66 lakh crores.
What Increases the Cost of Crude Oil?
What makes crude oil one of the top commodities to trade? The simple reason is that Crude oil trading in India tends to see greater market fluctuations than stocks and bonds. Here are some reasons why:
- – Like any other commodity, the price of crude oilis affected by the laws of supply and demand. Recently, a rare combination of oversupply and consistent demand has increased the pressure on the cost of oil.
- – Fluctuations in prices of crude oilare especially sensitive to decisions regarding output made by the ‘Organization of Petroleum Exporting Countries’ (OPEC).
- – Production costs, storage capacity, and interest rates all affect crude oilprices in decreasing capacity.
- – Political turmoil in oil-producing areas such as the Middle East also impacts pricing.
- – Natural disasters that could potentially disrupt the production of crude oilimpact its cost.
How To Trade Crude Oil?
Methods for trading for crude oil include using either futures contracts or spot contracts.
By entering a commodity futures contract, a trader agrees to buy or sell a specific amount of crude oil for a pre decided cost on a specific date. Crude oil exporters and importers use futures contracts for protection from the volatility of crude oil prices. This method is known as hedging one’s risks, and those who employ it are called hedgers. Alternatively, Speculators are traders that use futures contracts to predict the market movements in oil prices. Based on their predictions they buy or sell their contracts at a profit.
However, in order to trade oil futures, a trader first has to choose the appropriate exchange for the desired oil benchmark. An oil benchmark is defined as the reference point that determines standards for buyers and sellers of oil. Globally, significant crude oil benchmarks are provided by forecasts on Brent Crude, West Texas Intermediate (WTI). MCX also follows the trends observed on WTI.
Whereas the futures contract reflects the cost buyers are willing to pay for oil on a future delivery date, a spot contract reflects the present market price for crude oil. Commodity contracts purchased and sold using spot markets immediately take effect. The purchaser accepts the delivery of the goods and money is exchanged.
With crude oil, the demand for immediate delivery is smaller when compared to future delivery. The logistics of transporting oil are complicated, hence, investors don’t intend to take on delivery if it is immediate. This is often why futures contracts are more common among end-users as well as investors.