Know Your Commodity Before You Trade – Crude Oil

Crude oil ranks among the most actively traded commodities in global markets, and its price movements have a direct bearing on inflation, currency trends, and broader economic growth.

In India, crude oil derivatives trade on the Multi Commodity Exchange (MCX), giving market participants a way to track pricing, hedge exposure, and engage with a commodity that touches nearly every part of the economy, from fuel costs to manufacturing inputs.

This article looks at what crude oil is, how MCX contracts are structured, and the factors that typically influence its price.

What is Crude Oil?

Crude oil is a naturally occurring fossil fuel extracted from underground reservoirs. Once refined, it forms the base for products used daily across transportation, industry, and households, including petrol, diesel, jet fuel, LPG, and a wide range of petrochemicals.

Because it feeds into supply chains worldwide, crude oil pricing is shaped by macroeconomic conditions, geopolitical developments, and shifts in global supply and demand.

Uses of Crude Oil

Crude oil has widespread applications across industries:

• Transportation fuels (petrol, diesel, aviation fuel)
• Petrochemicals (plastics, synthetic materials)
• Fertilisers and chemicals
• Road construction
• Pharmaceuticals

Crude Oil Contract Variants Available on MCX

Commodities on MCX trade in standardised units called lots, and each crude oil contract carries a fixed lot size that determines the quantity of crude oil changes hands in a single trade.

Here’s the breakdown:

What does bbl mean?

bbl = barrel, it is a unit used to measure the energy content of Crude Oil

Trading Hours for Crude Oil on MCX

Crude oil contracts trade on MCX from Monday to Friday, with the session running until 11:30 PM (during US daylight saving time) / 11:55 PM. These extended hours let Indian market participants track global price movements as they happen, rather than reacting to them the next trading day.

What is Expiry in Crude Oil Trading?

Every crude oil futures and options contract has a defined expiry date. Contracts can be traded up to expiry, based on the settlement time set by the respective broker, since these are cash-settled contracts.

Please note: For futures contracts, margin requirements increase by 5% each day during the last five trading days before expiry. This additional margin needs to be maintained through that window.

Global Benchmarks of Crude Oil

Crude oil is classified based on density (light/heavy) and sulfur content (sweet/sour). The key global benchmarks include:

1. Brent Crude Oil
2. West Texas Intermediate
3. Oman Crude

MCX crude oil contracts are primarily linked to international benchmarks like WTI, ensuring alignment with global prices.

MCX Crude Oil Reference Rate

MCX crude oil futures track WTI prices sourced from NYMEX (CME Group). This linkage is what keeps domestic crude oil pricing consistent with global benchmark movements.

Factors Affecting Crude Oil Prices

Crude oil prices respond to a set of interconnected factors:

• Demand-supply dynamics: Production decisions by OPEC and OPEC+, along with global economic growth, directly affect the supply-demand balance.
• Geopolitical developments: Conflicts or instability in oil-producing regions can disrupt supply and add to price volatility.
• Inventory data: Weekly inventory reports from the US Energy Information Administration (EIA) often move prices in the short term.
• Global market timings: Oil markets operate across nearly 24 hours globally, so price-moving news can surface outside Indian trading hours.
• Currency movements: Crude oil is priced in USD, so INR depreciation can push up domestic crude oil prices even when international prices stay flat.

Risks Involved in Crude Trading

Commodity trading involves substantial risk, including:

• Price Volatility: Sharp moves due to geopolitical or economic news
• Global Dependency: Overnight developments impact domestic markets
• Leverage Risk: Margin trading amplifies both profits and losses
• Currency Risk: USD-INR fluctuations affect pricing
• Liquidity Risk: Certain contract months may experience lower trading volumes, impacting trade execution.

Top Crude Oil Producing Countries (2025)

1. United States
2. Saudi Arabia
3. Russia
4. Canada
5. Iran
6. Iraq

Source - Oil Production by Country 2026

Conclusion

Crude oil's weight in global markets comes from its deep linkage to macroeconomic indicators, international benchmarks, and geopolitical developments.

For anyone following commodity markets, understanding contract specifications, tracking global benchmark movements, and accounting for risk are useful starting points for engaging with crude oil as an asset class.

Watch video: Know Your Commodity: Crude Oil Trading Explained