Crude oil can be considered a trade diversification option for investors, as it is a profitable commodity and is also tagged as a global index. This makes it an attractive income. Being an everyday-use import-dependent commodity, market watchers say that it performs well under all given market conditions. Crude oil is traded on the worldwide index, which can give you good advantage of sitting at home due to everyday market activity and daily trading in high volumes. After understanding the changes in commodity prices and trade, crude oil stocks can give significant rate on investment (ROI). It offers many options, from short-term trading to long-term strategy, that can be beneficial to the investor.
These things have to be understood to start a trade
Often the price of crude oil fluctuates when there are challenges in production and supply. Due to this, unintended domestic results are seen in different parts of the world. Because of this, countries try to check their taxation and fuel policy on the basis of their crude oil import bill. This is also true for companies dependent on crude oil, which is a mark according to services and product pricing.
West Texas Intermediate (WTI) crude and Brent crude are the two standards through which the commodity is traded. Both differ in weight, sulfur composition, extraction locations and other characteristics.
In the Indian context, Brent crude is a commodity that is usually traded on the Multi Commodity Exchange of India Private Limited (MCX) or the National Commodity and Derivatives Exchange (NCDEX). For retail investors, the term commodity oil futures is used to buy crude oil stocks. It is estimated on a large scale and oil companies like Indian Oil Corporation, ONGC trade it in high volume. Given the worldwide energy usage, the crude oil market is one of the most dynamic markets and investors should be aware of the size of transactions that occur every day.
Contracts worth more than Rs 3000 crore per day
Every day, contracts for crude oil MCX futures are worth more than Rs 3000 crore and are in batches of 10 barrels and usually 100 barrels. This may require small investments with promising returns, they can be highly unpredictable and often require expert guidance.
Crude is a futures trade commodity, so investors end contracts every month, usually on the 19th or 20th of the month. In such a situation, it becomes necessary to reposition yourself in your portfolio at the last moment.
In addition, oil fields and production units may be closed due to natural disaster and health crisis. This often leads to oversupply or shortage of the commodity. In this regard, it is important to know that due to the Covid-19 epidemic, there was a lockdown worldwide and this has weakened the demand. This also led to a fall in prices at one time. Fuel consumption is at an all-time low due to worldwide aeroplane halt and lockdown in major importing countries.
For example, on 20 April 2020, WTI crude recorded an all-time low of $ 40 per barrel on account of the excess of under-bond crude and supplies. Due to oversupply, unsold stock in the market became very high. However, by August 2020, WTI has reached a position of $ +42 per barrel, registering an increase of 200%. These developments are a result of demand and supply, with post-lockdown recovery affecting growth. If invested properly, it is known that even retail investors can earn 200% profit in 4 months, but they have to be cautious in the game of demand and supply.
Also, if there is a conflict in the Middle East, such as Iran’s drone attack on Saudi Arabia’s oil field or the US-China trade conflict, then under these circumstances risks and prices increase. If the US has to buy US crude under the strictness of China, then the possibility of amicable dialogue increases and this will have an impact on the prices of crude oil. It would be right for Indian investors to monitor global developments to formulate strategies through the assistance of experts in brokerage firms, especially in fluctuations in crude oil stocks.
Hedging Strategy of Oil Companies and Indian Reality
Crude trade is like the image of the global economy and energy trade. Aviation companies, oil companies, refineries etc. have hedged their bets on the basis of frequent events around the world, their storage capacity domestically and low crude oil prices.
If they feel that there can be an increase in the prices of crude oil, then they form a hedging strategy for buying on the market. If they do not have enough space to store, then buying oil futures helps them. When the price increases, there is no need to spend additional resources, which reduces the risk.
Aviation companies like IndiGo, Spicejet, Air India are net users of crude oil through Essential Aviation Turbine Fuel (ATF). Their risk mitigation strategy is useful for individual investors. They track commodity movements on oil futures of oil companies and aviation companies through piggybacking on oil companies.
Being the largest commodity in terms of market size compared to gold or silver, there is a movement in the price in crude oil. India, China and many other Asian countries are net importers, they often continue with Oil Future. There are better chances of profitability with successive movements. Apart from this, it becomes important to remove the barriers of crude oil trade due to vested interests all over the world.
Especially given that it is a major source of revenue for many countries in the Middle East. As long as there are countries that need to import crude, there is a movement in prices and commodities and it is good for the economy. For Indian investors, this is a good hedge option, given that 80% of our consumption comes through crude oil imports.
Article: Anuj Gupta, DVP-Commodity & Currency Research, Angel Broking Ltd
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