Buying and selling crude oil: a step-by-step guide
Is it possible to trade crude oil in India?
On the MCX, crude oil is the most actively traded commodity. On a daily basis, the total value of crude oil traded on the MCX (across all futures) exceeds Rupees 3000 crores. This equates to about 8500 barrels of crude oil traded every day. Both corporate and retail individual traders participate actively in the crude oil market. On any given day, expect both upstream (ONGC, CAIRN, Reliance) and downstream (IOC, BPCL, HPCL) businesses to place orders on the MCX. These institutional orders, if I had to assume, are mostly used to hedge their exposure in the spot (physical) market. Retail traders, on the other hand, mostly speculate on crude oil prices.
I recommend that you look into the MCX’Bhav Copy’. This offers you an idea of the liquidity and volume of a certain contract.
We’ll discover how these contracts are formed in this chapter, from expiration to margins to P&L per tick.
To trade oil futures, how much money do you need?
The amount of money you’ll need in your account to day trade a crude oil futures contract varies depending on your futures broker, but you’ll need at least $1,000. Keep in mind that you’ll need enough funds in your account to cover any possible losses. If you don’t want to risk more than 1% of your cash on every single trade, you can limit yourself to $10 per trade.
How can I purchase crude oil?
You can invest in oil commodities in a variety of ways. Oil can also be purchased by the barrel.
Crude oil is traded as light sweet crude oil futures contracts on the New York Mercantile Exchange and other commodities markets across the world. Futures contracts are agreements to provide a specific quantity of a commodity at a specific price and on a specific date in the future.
Oil options are a different way to purchase oil. The buyer or seller of options contracts has the option to swap oil at a later period. You’ll need to trade futures or options on oil on a commodities market if you want to acquire them directly.
The most frequent approach for the average person to invest in oil is to purchase oil ETF shares.
Finally, indirectly investing in oil through the ownership of several oil firms is an option.
How do futures contracts for oil work?
In theory, oil futures contracts are straightforward. They keep the time-honored practice of certain market participants selling risk to others who willingly buy it in the expectation of profiting. To put it another way, buyers and sellers agree on a price for oil (or soybeans, or gold) that will be traded at some point in the future, rather than today. While no one knows what price oil will trade at in nine months, futures market participants believe they can.
Is crude oil trading profitable?
Crude oil, aside from gold, is one of the most successful trading commodities for investors. Trading crude oil, while lucrative, is difficult, especially if you lack the necessary tactics and are uninformed of the crude oil inventory. Crude oil trade is fraught with dangers. Small traders typically struggle to take advantage of the vast chances that this valuable commodity offers due to a lack of a comprehensive plan. So, to make things easier for tiny traders, we’ve put together a list of tried-and-true tactics that will help you win handsomely from crude oil trading.
The purchase and hold strategy is the most common among the several methods used by traders in crude oil inventory today. It is practical and allows traders to profit handsomely. Crude oil, like other commodities, operates on the demand and supply premise. Traders use this method to take into account demand and supply considerations. As a result, they take a measured stance. If the trader’s estimate proves to be correct, they close their position quickly and profit handsomely.
When trading crude oil, one of the most important things a small trader must consider is developing a strong plan that will help him profit. Not having a strategy, or having a bad one, will be costly and result in losses. There is a significant contrast between trading crude oil and investing in the stock market. In most cases, the latter is based on emotion and supposition, but not in the case of crude oil. You must have a thorough understanding of the energy business to achieve profitability. It is critical to enlist the assistance of market advisors for this. You must be well informed or have experts who are well informed about global social, economic, and political trends, particularly in countries that export crude oil. You will calculate how a significant shift in trends may affect your crude oil inventory trading today if one occurs.
Brent and West Texas Intermediate (WTI) crude oil are the two forms of crude oil traded. Both of these sorts are distinct and have their own set of advantages and disadvantages. WTI is one of the global oil benchmarks and is produced in the United States through fracking. Brent is extracted from the oilfield, whereas WTI is one of the global oil benchmarks and is produced in the United States through fracking. Some countries, such as India, import Brent, while others use WTI. You can trade in either of the two varieties, but you must be familiar with how they perform and which one will be profitable.
Spread trading is a highly effective strategy that, when used correctly, can yield substantial profits. Traders use this method to buy crude oil futures for a specific month and sell another crude oil future contract. Traders can profit from the differences in the purchasing and selling prices of the two contracts in this way.
To make the most money, you must be well-versed in the aspects that drive crude oil trade. US API Weekly Crude Oil Stock, US Crude Oil Inventories, US Gasoline Inventories, and US EIA Weekly Distillates Stocks are some examples of reliable inventory data. These studies will provide you with detailed information on the prognosis, demand, and supply, among other things.
Crude oil trading is extremely profitable, whether you are a tiny trader or a large corporation. However, if you performed it correctly, it would be beneficial. You may earn tremendous rewards by establishing a strong plan, understanding today’s crude oil inventories, and collaborating with the proper investors or organizations like Enrich Broking. So, for the greatest outcomes, work with a trustworthy and authentic company like Enrich Broking to get your crude oil trading off to a good start.
In India, where can I buy crude oil ETF?
Crude oil is sold on the futures market in India. To buy crude oil in India, you must first establish a demat and trading account with a broker. Crude Oil is traded on the MCX, and you can purchase it once your account has been established.
What is a futures contract for crude oil?
Crude oil futures are contracts in which buyers and sellers of crude oil coordinate and agree to deliver certain volumes of physical crude oil at a future date. The benchmark crude oil futures contract in the United States is for West Texas Intermediate, a type of oil with a low density and sulfur content that makes it relatively easy to refine. Many traders refer to the contracts as NYMEX WTI crude oil futures since they have historically traded on the New York Mercantile Exchange. Brent crude oil futures, which feature a different grade of oil found in the North Sea off the European mainland, are also widely traded around the world.
The specifications for crude oil futures contracts are specified in such a way that they can be traded evenly by market participants. Each contract includes 1,000 barrels, with delivery dates ranging from three to nine years in the future. The seller must deliver the oil to the buyer at a pipeline or storage facility in the energy hub of Cushing, Oklahoma, at some point during the delivery month, with a legal transfer of title accompanying the actual physical transportation of oil.
Is crude oil a finite resource?
Although you can’t scent rotten oil from an oil drum lid as you can a gallon of milk, crude oil can go bad under the correct circumstances and with improper exposure. Oil, unlike other products, does not include components that expire on a regular basis.
What is the duration of an oil futures contract?
You’re not going to the store and buying a couple thousand 55-gallon barrels of crude oil to store in your backyard, are you? That’s just not feasible.
Crude oil futures contracts were created to allow oil corporations and companies that consume a lot of oil to plan delivery of the commodity at a set price and date. Today, these contracts are also traded between speculators who expect to profit from the commodity’s volatility.
On the futures market, these derivatives are a hot commodity, with the potential to yield large gains in a short period of time. Unfortunately, when bad decisions are made, the consequences can be just as severe.
The majority of oil futures contracts include the purchase and sale of 1,000 barrels of crude oil. When a contract is purchased, it stipulates that these barrels of oil will be delivered at a certain date (up to nine years away) and for a predetermined price at a predetermined date (or expiration date).
Let’s imagine you bought an oil futures contract today with a three-month expiration date; you’d be owed 1,000 barrels of oil three months from now, but you’d pay today’s price let’s say $50 per barrel as an example.
You notice that the price of oil has climbed to $51 per barrel in 30 days, indicating that your futures contract is now worth $1,000 more than you paid. If the price of oil fell to $49 per barrel, on the other hand, you would have lost $1,000.
In either case, you’ll want to sell as soon as possible when the contract expires. Individual investors and price speculators who aren’t large-scale crude oil users typically close off futures contracts well before they expire.
- You’re probably not going to be able to store 1,000 barrels of oil. You probably don’t have enough room to store 55,000 gallons of oil. If you own the contract when it expires, you’ll have to decide where to store the oil and what to do with it. Your entire investment is gone if you opt not to take ownership.
- Futures contracts lose value as they get closer to expiration. The futures market operates at a breakneck speed, with the thrill being in forecasting what will happen in a week rather than when the contract will expire. The premium paid for future value growth decreases as the contract approaches its expiration date. As a result, holding these contracts for too long will limit your prospective gains.
Pro tip: If you want to invest in oil futures, you should open an account with a broker who specializes in future contracts. When you open an account with TradeStation, you can get a $5,000 registration bonus.