- What is a Futures Commission Merchant - Role, Obligations & Responsibilities
- What is an Outright Futures Position: Definition, Advantages, & Example
- What is Managed Futures Account: Definition, Advantages & Example
- Cost-of-Carry: Definition, Carry Model & Example
- What are STIR Futures & Options: Definition, Price Quotation & Example
- What are shout options?
- What is Futures Spread
- What is the Fed Fund?
- Gold Futures
- What is a Short combination?
- What Is a Multi-Leg Options Order?
- What are Swap Derivatives?
- What are Long-dated Options?
- What are currency derivatives?
- What is Short Covering?
- What is Margin Money?
- What are market indicators?
- Tips for Getting Into Futures Trading
- Receiver Swaptions
- Copper Futures
- All About Commodity Options
- Futures and Options
- What is Option Premium
- What are Naked Options?
- How are options settled?
- What is Box Spread trading Strategy
- What is Eurex? Understand Here!
- What is Credit Spread Strategies
- What is a Diagonal Spread and How does it work
- What is Zero-Cost Collar Strategy
- What is Quadruple Witching
- What are Equity Derivatives?
- What are Exchange Traded Derivatives?
- What are Forex Options?
- What are Oil futures
- What is a Cash Settlement?
- What is Long Combo Option Trading Strategy
- What is Hedging with Futures?
- What are Commodity Options?
- Synthetic Options Spread
- Put Writing Strategies
- What Is Call Option?
- What are Bermuda Options
- What is call writing?
- What is a Protective Put?
- What are Weekly Options?
- What is Derivative Trading?
- What are Collateralized Debt Obligations?
- Why futures prices converge upon spot prices
- How to Calculate F&O Turnover
- How to Use LEAPS for Covered Call writing
- What are cash secured puts?
- Short Call Ladder Options Strategy
- Long Call Ladder Options Strategy
- Short Call Condor Options Strategy
- Long Call Condor Option Strategy
- Short Put Ladder Options Strategy
- What is a fiduciary call? Understand here
- Options Trading Strategies: Vertical Spreads and Synthetic option spreads
- What is a derivative?
- What are bond futures?
- What is a bond option?
- What is a hedging strategy?
- What is Put Ratio Spread
- Seagull Options
- What is E-mini futures
- How to be a successful options trader?
- Top 10 Mistakes when trading cheap options and how to avoid them
- How are futures prices determined
- What are over the counter (OTC) options
- What is a Short Put Butterfly option strategy
- Difference between warrants and calls
- What is a call ratio backspread option strategy
- What is cross currency swap
- Options arbitrage strategies
- What are commodity futures?
- What is options trading?
- What is expiration time in options trading?
- What are Index Futures?
- What is a Strike Price?
- What is LTP in the Share Market?
- What is Spot Price?
- What is an Underlying Asset?
- What is a Forward Contract?
- What is futures trading?
- Benefits of trading in futures
- Show all articles
What are Oil futures
Crude oil is an indispensable fuel source and most versatile chemical raw material. It is the very foundation of the modern way of life as we know it and is virtually in every article and equipment we use today. And while it amounts to a third of the entire energy requirement the process of discovery, extraction, processing, and transportation of crude oil is long and complicated. Even things like storage of crude oil and its by-products are ever evolving challenges that increase in difficulties with constant change in availability in storage and refining capacity.
Crude Oil Futures in India
In India crude oil futures are listed on Multi Commodity Exchange and are traded between 9:00 am to 5:00 pm from Monday to Friday.
The contract is for 100 barrels i.e. lot size is 100, and price is quoted in terms of price per barrel. Therefore, if the price of barrel is ₹6,815 then the value of contract would be (₹6,815*100) ₹6,81,500.
The tick size of the crude oil futures contract is ₹1, meaning every price change will at least be ₹1 and would impact mark-to-market by ₹100. The exchange has stipulated a minimum margin of 10% of contract value. However, the SPAN margin mechanism is also deployed. The exchange charges a minimum of 10% of contract value or SPAN, whichever is higher.
The Exchange has implemented a narrower daily price limit slab of 4%. Whenever this narrower slab is breached, the relaxation will be allowed for additional 2% without any cooling off period in the trade. In case the daily price limit of (4% + 2%) 6% is also breached, then after a cooling off period of 15 minutes, the daily price limit will be relaxed another 3% i.e. upto 9%. In case price movement in international markets is more than the maximum daily price limit (currently 9%), the same may be further relaxed in steps of 3% and will be informed to the Regulator immediately.
In case of additional volatility, an additional margin (on both buy & sell side) and/ or special margin (on either buy or sell side) at such a percentage, as deemed fit, will be imposed in respect of all outstanding positions. The exchanges can charge an “Extreme loss margin” of additional 1%.
NYMEX crude futures
MCX crude oil contract is directly based on the NYMEX WTI (Western Texas Intermediary) commonly referred to as “Light Sweet” crude oil. WTI price is quoted in USD per barrel and MCX crude oil futures being a “derived” and a “mirror” contract, simply assumes conversion of USD to INR. The USD/INR rates are based upon the RBI published spot rate.
Therefore, if NYMEX Crude oil is trading at $ 83.00/barrel and USD/INR is trading at 81.55, the resulting MCX crude oil will be priced at (83.5 * 81.55) ₹6,810/barrel.
On the international exchanges platform crude oil futures are traded for almost 23 hours a day.
Participants in crude oil futures
Crude oil futures usually have a high liquidity and are frequently used by market participants and actual users like oil refineries and oil companies like ONGC, HPCL and others. The end users of crude oil by-products like paint companies and tyre companies also form a significant base of crude oil futures trading like Asia.
It is important to remember that the crude oil represents the input cost for the refineries, and the by-products are the revenue generators. Therefore, refineries always take a long position in crude oil derivatives to hedge the cost and shall always take a short position in by-products like gasoline, diesel and jet-kero, etc. There are contracts listed on NYMEX that represent “crude oil to gasoline distillation spread” more commonly known as Crack spread (cracking is termed used to distill crude oil into by-products).
Crude oil futures are also traded alongside Natural gas futures as a ratio spread. As both of them represent the major component of the energy basket, they are likely to move in tandem. The commodity specific demand and supply, seasonality, production capacity do play a role in pricing. But overall, the energy basket is supposed to move in sync, and therefore the lagging commodity will catch up to close the gap.
Another possibility with Crude oil futures is trading the spread between the calendar months. Crude oil is generally priced in backwardation i.e. the near month contract is more expensive than the next month, and the next month is more expensive than the far month. The discounted next month contract to the near month does not mean that there is decline in demand. But the near month contract premium represents the urgency for immediate delivery.
The crude oil futures calendar spreads are generally traded in backwardation but the discount in next month can change into premium when unforeseen events occur. For Eg: During the first Covid-19 worldwide travel ban and lockdown in major countries prompted the near month oil contract to nose dive to $ 0.20 near zero levels, while the far month was trading at sub $ 10.00 levels.