Crude Oil Trading in India

Crude oil is the mother of the global financial market in general and the commodity market in particular, as this product contributes significantly to global economic development. A sharp increase in global crude oil prices causes higher inflation, prompting nations to look for alternative energy sources such as biofuels. Crude oil prices are influenced by factors such as supply and demand, geopolitical tension, weekly oil inventories, international trade trends, adverse weather conditions in the Gulf of Mexico, and so on. Among the various grades, West Texas Intermediate (WTI) and Brent are two important crude oil grades that are widely used around the world. NYMEX is the benchmark exchange for WTI oil while Inter Continental Exchange is the benchmark exchange for Brent oil. 

In India, crude oil and natural gas are available for trading in a smaller contract size when compared to their global benchmarks. Both of these contracts are cash settled contracts and no delivery takes place because of logistical challenges. In the following paragraphs, you will be gaining more understanding about trading aspect in Indian exchange.

Table 1: Contract Specifications

Source: Multi Commodity Exchange of India

Understanding Crude Oil Trading in India

In MCX, WTI grade of crude oil is available for trading with NYMEX WTI oil as its benchmark. The price movement of MCX crude oil is exactly same as that of their global benchmark with price quotation in Indian Rupee. Since inception of the nationalized commodity exchanges in India in 2003, crude oil futures were part of the commodity list and the options on crude oil futures were introduced in May 2018.

Over the period, crude oil options are gaining popularity amongst the investors and in the fiscal 2022-23, crude oil options are superseding the futures contracts. Following chart depicts month on month growth in the crude oil futures and options. Since beginning of April 2022, crude oil options volumes are much higher than futures volume and in March 2023, options turnover was 10 times more than futures turnover.

Table 2: Options contract specification

Source; Multi Commodity Exchange of India

Options are one of the best derivative products, and their product nature gives them an advantage over futures contracts. Because options provide the right to buy or sell an instrument but not the obligation to complete the transaction upon contract expiration by simply paying a premium to the counterparty. However, contracts in futures are a little larger and attract a large margin against a premium in options. The above chart clearly shows that options outnumber futures contracts in terms of volume. The creation of various strategies in all types of market movement, such as bullish, bearish, and neutral, is an important fact to understand about options contracts.

Energy Index

The introduction of commodity-based indexes was another watershed moment in India's commodities derivative trading history. The Energy Index ENRGDEX is a blessing in disguise for commodity investors in India because it captures the individual movement of crude oil and natural gas as a whole, making it the most effective investment tool for retail traders. ENRGDEX is a sectoral index comprised of crude oil and natural gas, with 75% and 25% weightings, respectively. The biggest advantage of ENRGDEX is that it has a lower margin than crude oil and natural gas futures contracts.

Crude Oil Futures and Options: How to Trade in Crude Oil Derivatives - ICICI Direct

Summary

The energy sector is the second largest turnover generator in the Indian commodity exchange, accounting for 37% of total volume. Crude oil prices in India are determined by their global benchmark, which is priced in Indian rupees. Energy products—Futures, Options, and Indexes—are the most preferred commodities for beginners to start with before moving on to other commodities. All investment products in the energy sector, such as futures, options, and indexes, are cash settled contracts, so traders do not have to worry about their open positions becoming mandatory delivery as they do with other commodities.

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