Crude Oil Trading: Guide for Beginners in India Online | Espresso

Trading Oil as a Commodity: A Beginners Guide

Today, crude oil is almost as vital as water. The unique standing of oil in the world’s economic and political systems makes it one of the most heavily traded commodities in the market globally.

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Commodity trading in oil also offers liquidity because of the high volume of trade. Further, the volatility of the energy market allows investors to earn consistent returns in short-term swings and well-timed long-term strategies. However, commodities trading is sensitive to market volatility.

If you want to do commodity trading, here is a quick guide that can help you understand online trading in India and how to do commodity trading online in oil:

What are Commodities?

Commodities are naturally occurring materials or goods that form the basis of the economy and help produce other goods or services, such as food, energy and clothing. Commodities are standardised and are interchangeable. A few commodities include crude oil, natural gas, iron, steel, gold, silver, cotton, grain, pulses, etc.

What is Commodity Trading Online?

Similar to stock trading, commodities are also traded online on certain exchanges, such as MCX (Multi commodity exchange), NMCE (National multi-commodity exchange), ICEX (Indian commodity exchange), etc.

You can undertake commodity trading and aim to profit from the fluctuating prices in the commodity market. You can buy a commodity, such as oil, expecting an appreciation in its future price. When the commodity price hits the target in the future, you can sell the commodity to earn profit from the price differential. However, you need to open a trading account to be able to undertake commodity trading in India.
Also Read: Agri Commodity Trading

How does Oil Trading Online Function?

You can do commodity trading through a trading account and choose any of these investment options:

  • Oil company stocks: In this, you buy equity shares of an oil company that you believe might become profitable in the future. Generally, a rise or fall in oil prices affects the share price.
  • Contracts for difference (CFDs): In a CFD, you enter into a contract with the seller for commodity trading online based on the oil price difference (entry and closing prices). If the closing price of oil is higher than the opening trade price, the seller will pay you the difference, and vice versa.
  • Exchange-traded funds (ETFs): ETFs are closed-ended funds listed on a stock exchange. ETFs usually track an index and allow you to invest in shares and commodities like oil, gold, etc.
  • Oil Futures: Oil futures are standardised contracts where the buyer and seller agree to exchange oil at a pre-defined price on an agreed date. At maturity, the contract is settled physically, in cash, or rolled over to the next expiry date. Commodity trading in India involves contract settlement in cash, and there is no physical delivery of oil. Oil futures is one of the most popular medium of trading online in oil.

How does Oil Futures Work?

Online trading in India for oil can happen in main crude oil (lot size of 100 barrels) and mini crude oil (lot size of 10 barrels). Both futures contracts expire on the 19th and 20th of every month. The price quote is per barrel.

For instance, you prefer trading online in main crude oil through a futures contract. You expect the oil prices to rise in the future. The current oil price per barrel is ₹3,000, and the futures contract is 100 barrels. The total investment is ₹3,00,000. However, when commodity trading in India through a futures contract, you do not have to pay the entire sum and pay a margin of 5%, which equals ₹15,000.

Now, the oil prices rise to ₹3,500 per barrel. In this case, if you sell your futures contract of ₹3,000 per barrel, you earn a profit of ₹500 per barrel. Your total profit is ₹50,000 with an investment of ₹15,000.

You can also profit from falling oil prices by trading online by taking a short position on the futures contract. For instance, the oil price per barrel falls to ₹2,700. However, in this case, if you go short on your contract, you can still sell your 100 barrels for ₹3,000 per barrel.

Should You Trade in Oil?

You can consider trading online in oil if you prefer minimal investment and potentially high profits. However, oil futures are also highly volatile, and it is difficult to predict the future movement of oil prices. Therefore, it is advisable to consult an expert for trading online in oil or a similar commodity. 

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Frequently Asked Questions

Yes, you can invest in crude oil by buying stocks of oil companies, investing in a CFD (contracts for difference), choosing an ETF (Exchange-traded fund) or opting for a futures contract. 

Commodity trading online in oil can be profitable in most market situations because of the unique standing of oil in the economic and political system of the world.

What Factors Influence Oil Trading Online?

  • Global oil output or supply
  • Oil demand in emerging and developing countries
  • Global economic performance
  • The push for alternative energy sources
  • Weather conditions
  • Global geopolitics