Crude Oil Trading: Powerful way of trading Crude in 2022

Crude oil trading is the most popular commodity trading in the world.

Trading crude oil has its own advantages over other commodities because it is one of the most volatile commodities. Crude oil is also called “Black Gold” in today’s world as global demand for the commodity never seems to stop.

Table of Contents

• Crude oil commodity market
• Factors affecting crude oil prices
• Crude oil trading in India
  • Crude oil futures on MCX
  • Crude Oil Options on MCX
• Crude oil Trend in 2022
• FAQ

Crude oil trading remains a crucial component of economic equations for developing countries and developed countries alike. Recent global developments such as the COVID and Russia-Ukraine crises have refocused attention on commodities and inflation, and no matter how quickly the world adopts renewable energy sources, the fact remains that we are still heavily reliant on fossil fuels, and they are not going away.

In this blog, we will learn about crude oil markets and what influences crude oil prices. Aside from that, we will examine key aspects of crude oil trading in India and analyze the crude oil trend in 2022.

Crude oil commodity market

The crude oil market is the most liquid in the world, with participation from major oil companies, banks, institutional investors, and hedge funds from all over the world. WTI (West Texas Intermediate) and Brent crude have provided a benchmark for crude oil prices.

Brent crude oil trading determines the price of a broader market base such as the Middle East, Europe, and Africa.

Brent crude is a commodity future product of Intercontinental Exchange (ICE) whereas WTI is of New York Mercantile Exchange (NYMEX).

According to the most recent data, ten major oil producing countries account for 70% of global oil production, 27% of which is produced by the United States.

Factors affecting crude oil prices

Crude oil prices are extremely volatile, owing to uncertainty in demand. For example, during the COVID 19 crisis, extreme speculation about demand falling caused a significant drop in crude oil prices, whereas at the start of the Russia-Ukraine crisis, prices reached an all-time high.

The following are the major factors influencing crude oil prices:

1. Global demand and supply fluctuations

2. US Dollar exchange rate change relative to other currencies like Euro Japanese Yen and GBP

3. Economic factors like industrial growth, PMI data, global macroeconomic data, crisis, recession, and inflation 

4. OPEC(Organization of the Petroleum Exporting Countries) announcements – OPEC countries have a significant influence on Brent oil prices, accounting for 35% of global crude oil share (see graph).

5. Weather and global climate change

6. Government trade policies (import duties, penalties, and quotas)  Geopolitical events

7. Changes in oil exploration and refining technology

8. Major technical advancements in renewable energy 

Crude oil trading in India

In India, there are three types of market participants in crude oil trading: the first are large oil companies such as Reliance IOCL, BPCL, and ONGC, the second are companies that are directly affected by oil price changes, such as aviation companies, and the third are retail participants.

The first two segments of participants are active hedgers, and retail participants are the speculators.

Trading in crude oil options has highest notional turnover of 9,31,258 (Cr.) YTD whereas in futures trading stood at third place this year with turnover of 3,03,983 (Cr.) [Source MCX trade Data 2022]

MCX and NCDEX are two major exchanges for trading crude oil, There are two ways in which you can participate in crude oil trading in India-

1. Crude oil futures
2. Crude oil options

Crude oil futures on MCX

Crude oil futures have a monthly expiry date. Trading with futures carries risk, and one should always check the risk exposure before entering into a trade. A future contract’s payoff graph looks like this:

Future Contract Specifications:-

Symbol CRUDEOIL

No. of contracts in an year- 12

Trading Period-   Monday to Friday

Trading session- Monday to Friday: 9:00 a.m. to 11:30 p.m. / 11:55* p.m. (* Based on US daylight saving time period.)

Trading Unit-  100 barrels

Maximum order size-   10,000 barrels

Minimum tick size- 1 rupees

Initial margin- minimum of 10% or based on SPAN, whichever is higher

Settlement- Cash settled 

Crude Oil Options on MCX

Crude oil options are the more popular form of trading in India. Lower margin requirements and liquidity might be the reason for the same.

Crude oil option contract specification:

Option Type- European call & put options

Expiry Day- Two business days prior to the Expiry day of the underlying futures contract

Trading Period-  Monday to Friday

Trading session- Monday to Friday: 9:00 a.m. to 11:30 p.m. / 11:55* p.m. (* Based on US daylight saving time period.)

Base value- Rs. per barrel

Strike price intervals- 50 rupees

Minimum tick size- Rupees 0.10

[Suggested Reading : How to start commodity trading?]

Crude oil Trend in 2022

So far, the crude story has been full of twists and turns, with volatility remaining high after February 2022.

We can divide the crude oil chart into two parts: before the Russia-Ukraine crisis and after.

Prior to the crisis, crude oil was in an uptrend with less volatility, climbing steadily and quietly. When Russia attacked Ukraine on February 24, 2022, crude oil, like all other commodities, experienced a massive spike.

Next week, Brent crude oil reached an all-time high of 135.783 before plummeting sharply.

Since then, it has failed to break through the 127-point barrier and has tested the critical support level of 100 four times.

Now that the level of 100 has become week, any move below it could spark a selling rally, sending Brent back to its previous year’s support band of 60-70.

However, if crude takes support at 100, a much more range-bound movement is expected for the rest of the year.

FAQ

BULLS ARENA TRADING