Crude Oil is one of the most important natural resources that impacts the daily lives of people worldwide. Crude Oil is measured in barrels.
1 barrel equals 42 gallons. 1 gallon contains 3.78541 litres.
Therefore, 1 barrel equals 158.98722 litres.
Crude oil is a raw natural resource that is extracted from the earth and refined into usable products, such as Petrol (gasoline), diesel that we use to fuel cars, trucks and aeroplanes.
For many countries like India and China, crude oil is considered as the primary source of energy production. Major oil producing countries include the U.S., Saudi Arabia, Russia, Iran and Iraq.
We have four major oil benchmarks used to trade oil contracts, futures and derivatives.
The petroleum industry generally classifies crude oil based on its geographic location of production.
Brent crude is the most popular and the most traded of all of the oil benchmarks.
The other three are West Texas Intermediate (WTI), Urals oil and Dubai / Oman Crude.
We have different types of crude oil blends;
- Sweet & light,and
- Sour & heavy.
Sweet does not refer to taste. It refers to the crude oil’s sulphur content. If a crude oil has higher than 0.5% sulphur content, then it’s considered as sour. Less than 0.5% sulphur content is considered sweet.
WTI and Brent crude is defined as light and sweet crude oils.
What is Brent Crude?
Brent crude is also known as Brent Blend, Brent Oil, North Sea Brent Crude and London Brent.
Brent crude is extracted from the north sea near europe. Major oil fields include Brent, Ekofisk, Forties, and Oseberg. It’s used as a benchmark for the light oil market in Europe, Africa and the Middle east.
It’s easier to refine light density and sweeter crude oil into gasoline and other petroleum products than a heavy density.
Brent Crude is considered as the global benchmark for oil as two third of world’s oil is prices off based on Brent crude futures.
What is West Texas Intermediate (WTI)?
West Texas Intermediate (WTI) is the benchmark for the U.S. light oil market as it is sourced from U.S. oil fields. WTI trades on the New York Mercantile Exchange (NYMEX).
West Texas Intermediate (WTI) is traded in the U.S. Exchanges.
Brent Crude trades on the Intercontinental Exchange (ICE).
The Organization of the Petroleum Exporting Countries, more commonly known as OPEC, uses Brent Crude as their pricing benchmark.
OPEC is a very powerful group of 13 oil exporting countries which controls most of oil production and distribution. OPEC is largely responsible for setting oil prices.
As Brent is produced near the sea, transportation costs are significantly lower in comparison to West Texas Intermediate (WTI), which is produced in landlocked areas.
Brent crude is considered as a benchmark for oil pricing as it is traded more than half of the crude oil traded internationally.
How Crude Oil is traded?
Around the world, Crude oil is traded as a global commodity. It is traded as spot oil and via future contracts in markets. This means, investors can purchase two types of oil contracts in the market: spot contracts and future contracts.
Price of the spot contracts reflect the current market price of crude oil.
Future price reflects the price that the market is willing to pay for crude oil on a specific future delivery date.
Large buyers who have deep pockets generally buy oil from the spot market.
Most producers, consumers, retail and institutional traders buy or sell crude oil futures or options based on their strategy.
We have speculators who participate to profit from short term price changes. These speculators will not be interested in taking delivery of the underlying commodity at expiry date.
Price of future contracts
Future contracts of crude oil is an agreement between a buyer and seller to buy or sell a certain number of barrels of oil at a predetermined price on a specific future date.
Price of a future contract reflects the price that buyers are willing to pay for oil on a predetermined date. It’s not the actual price that the commodity will have on a predetermined date. It’s just the price that market participants are anticipating.
Buying futures is essentially considered as a gamble on what price will actually be on the delivery date. There is no guarantee that crude oil will be traded at future price on that date.
Future price is an anticipation of market participants. If you guess correctly, you will make money. Future prices can be higher, lower or equal to the spot prices.
Investors closely watch these two prices to understand the oil market and expectations. If the future price is higher than spot price, then it means that the market is expected to improve and expectations are bullish.
In case the future price is lower than the spot price, then the market will most probably deteriorate and the expectations are bearish.
Rising demand and declining or flat production moves crude oil prices higher as it encourages traders to bid higher. On the contrary, oversupply and shrinking demand for crude oil encourage traders to sell.
Prices of crude oil have been highly sensitive to geo-political tensions owing to their wide spread demand and limited source of supply. Crude oil is produced in few countries while it is utilised extensively all over the world.
Many investors prefer to invest in energy stocks instead of directly buying or selling oil or related financial instruments.
How crude oil is traded in the Indian Market?
As crude oil is used in almost every sector of our economy, it becomes one of the most widely traded commodities globally.
Like any other commodities, oil price is also affected by the law of supply and demand. Production cost, currency fluctuation, storage, OPEC announcement, political turmoil, natural disaster and interest rate are factors impacting oil prices.
In order to hedge crude oil price volatility, futures and options contracts are available for trading in India.
In India, Crude oil futures on New York Mercantile Exchange (NYMEX) are considered as global benchmarks. This means it’s directly based on the NYMEX WTI (Western Texas Intermediary).
In India, Crude Oil futures and options are traded on the Multi Commodity Exchange (MCX).
In the Multi Commodity Exchange (MCX) crude oil is the most actively traded commodity along with Gold, Silver and Natural Gas.
MCX is India’s largest commodity derivatives exchange established in November 2003. It’s based in Mumbai.
In order to trade in commodities through a SEBI approved broker, you need to activate the derivative segment in your trading account. Your broker may not charge any additional fee for activation, but they may ask for PAN, Aadhaar and income proof.
Oil producers, refiners and large consumers take interest in futures contracts as a part of their hedging strategy. Whereas retail and institutional traders look for short term profits based on price movements.
You will find two types of Crude Oil Contracts in Multi Commodity Exchange (MCX);
- Crude Oil (Main)
- Crude Oil (Mini)
Crude Oil (Main) is traded on Multi Commodity Exchange (MCX) with code CRUDEOIL. Trading unit of CRUDEOIL is 100 BBL.
Crude Oil (Mini) is traded with the symbol CRUDEOILM. Trading unit of CRUDEOILM is 10BBL.
Quotation for both is per Barrel basis. Both contracts vary in the lot size. The Lot size of CRUDEOIL is 100 barrels (100 BBL). The Lots size of CRUDEOILM is 10 barrels (10 BBL).
Price quote for both contracts is on a per barrel basis.
If the price is 5946 rupees, then to trade CRUDEOIL, you need to have at least 5,94,600 rupees. Whereas, to trade CRUDEOILM, you are required to have at least 59,460 rupees as its trading unit is 10 BBL.
Due to lesser capital requirement, Crude Oil Mini is favourite among the retail trading community.
Every month MCX launches new contracts. You can get these details in the MCX circular.
In order to trade in CRUDEOIL or CRUDEOILM, you can open your trading account with any SEBI approved broker which is affiliated with MCX or NCDEX.
Market participants can also trade in option contracts of crude oil listed with MCX.
As MCX crude oil contracts are based on NYMEX WTI (Western Texas Intermediary), you need to watch WTI price and USD/INR price to arrive at the MCX crude oil contract price.
For example, if WTI is trading at 82 USD per barrel and USD/INR is trading at 83, then the resulting MCX crude oil will be priced at 6806 INR per barrel (i.e. 82*83).
MCX trade timing
Trading in MCX takes place 5 days a week except trading holidays declared by the exchange. Normal session timing of MCX is 9:00 am to 11:30 pm.
Due to daylight savings that typically happens between November to March of the following year, the end session is at 11:55 pm instead of 11:30 pm.
You can get the trading holidays list from MCX website.
Crude oil is one of the world’s most important commodities which has a high impact on countries’ economies.
Rising oil prices means higher shipping costs and increase in input costs for producers.
As in any commodity, crude oil prices are mainly driven based on the principles of supply and demand. When supply goes up and demand comes down, we have lower prices. In case of rising demand and short supply, crude oil prices will go up.
Frequently Asked Questions – FAQs
What is OPEC and which countries are part of it?
The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq. OPEC is an association made up of 13 of the world’s biggest oil-producing nations. These nations are;
- Iran
- Iraq
- Kuwait
- Saudi Arabia
- Venezuela
- Libya
- United Arab Emirates
- Algeria
- Nigeria
- Gabon
- Angola
- Equatorial Guinea
- Congo
As OPEC controls more than three-quarters of the world’s oil reserve, they almost control the production and supply of world’s oil market
Russia, Canada and the U.S. are not part of OPEC.
Link to know more about OPEC.
Why do people invest in future contracts?
As we said, an oil future contract is basically an agreement to buy or sell a certain number of barrels of oil at a predetermined price, on a predetermined date.
Investors buy future contracts with an anticipation to lock in price. It’s basically a gamble on what the price will actually be in future. They will make money only if they correctly guess the price, or else they have to take the loss.
What is the symbol for Brent crude oil?
We have two major crude oil contracts traded in the market.
In Europe, Africa, and the Middle East, the benchmark is North Sea Brent Crude, which trades on the Intercontinental Exchange (ICE).
You can track Brent crude oil on Investing.com. The code is LCOc1.
You can track Brent crude on Reuters news service site.
What is the symbol for West Texas Intermediate (WTI) crude?
In North America, the benchmark for oil futures is West Texas Intermediate (WTI) crude, which trades on the New York Mercantile Exchange (NYMEX).
You can track WTI on Investing.com. The code is CLc1.
You can also track NYMEX Crude Oil (CLc1) in Reuters news service site.
Link to track the energy market. You can also track it here.
What is the spot market?
Spot market is where crude oil is traded for immediate delivery. It’s also referred to as cash markets or physical markets.
Any trade in this market means both buyer and seller agree to the trade right now.
The current price of the commodity is called the spot price. It’s the price at which crude oil can be bought and sold immediately. Spot prices keep changing every second trade by trade.
The New York Stock Exchange (NYSE) is a spot market where buyers and sellers transact for immediate delivery.
What is the future market?
If somebody says he bought oil futures, then it means he has bought oil futures contracts.
In the future market, a transaction agreeing to a price now is decided but delivery and transfer of funds will take place at a predetermined date.
In the United States, futures contracts are regulated by the Commodity Futures Trading Commission (CFTC).
The Chicago Mercantile Exchange (CME) is a future market, where traders can buy and sell futures contracts.
Futures are derivative contracts that use the spot market as the underlying asset. Futures basically help to hedge the price movement of the underlying asset to help prevent losses from unfavourable price changes.
What is the difference between hedgers and speculators in the oil market?
We have two major categories of market participants in the derivative market: hedgers and speculators.
An oil producer may use future contracts to lock in a price they want to sell at a predetermined date. They will deliver the oil to the buyer when the contract expires. It helps the oil buyer to plan in advance as they will know the price that they will pay for the oil in future
Future contracts are traded in the market. Based on the underlying asset’s price movement, speculators try to make profit by trading in futures based on predictable price patterns and technical indicators. They are not interested in the underlying commodity. They are betting on the price movement of the underlying assets.
A trader may buy oil futures if they expect the price of crude oil to increase before the expiry date. Similarly, they may prefer to sell if the price of underlying crude oil is about to come down.
Speculators trade future contracts purely for profit. Hedgers use futures to lock in a price today to reduce market uncertainty.
What is Persian Gulf Oil?
Persian Gulf oil is middle eastern crude from Dubai, Oman or Abu Dhabi. Compared to WTI or Brent, Persian Gulf oil is somewhat heavier and has higher sulphur content. It’s also referred to as Dubai/Oman Crude. Persian Gulf oil is delivered to the Asian Market.
Dubai / Oman crude oil futures are traded on the Dubai Mercantile Exchange.
What is Russian Urals oil?
Urals oil is a benchmark used for pricing of the Russian export oil mixture. It’s basically a mixture of light oil of western siberia and heavy sour oil of Urals. Ural oil futures trade in Moscow exchange.
What impacts crude oil prices?
Crude oil prices are influenced by the demand and supply principles.
Demand and supply fluctuate based on followings;
- Oil consumption by importing countries,
- Production announcements of the Organization of the Petroleum Exporting Countries (OPEC),
- Production and inventory position in US,
- Economic growth in major consuming countries,
- Inventories in OPEC and non-OPEC countries, and
- Geo-political tension.
Also Read: What is Forex Trading: Is it legal to trade currency pairs in India?
Disclaimer: In addition to the legal disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
