Crude oil mini contract properties

Crude oil, referred to as ‘black gold’ by many, can be refined to produce fuel and petrochemical products.

Interestingly, it is a highly traded commodity on commodity exchanges. Multi Commodity Exchange or MCX also offers crude oil contracts.

Recently, MCX has launched mini contracts for Crude oil futures.

What are mini contracts?
The mini contracts work in the same way as regular contracts, just that their size is smaller. For crude oil, the size of the usual contract is 100 barrels, but the size of mini contracts is 10 barrels.

BARRELS of Crude oil?
Do not worry; you won’t have to bring home oil barrels if you buy crude oil on MCX. Because these contracts are cash settled.

Adding mini to your watchlist
Search for Crude oil and look for this symbol ‘CRUDEOILM FUT’ to add them to your watchlist.

How does its P&L work?
Crude oil mini contracts have a tick size of Re.1. Now, as the lot size is 10, every rupee move will give a profit or loss of Rs. 10.

Benefits of these mini contracts?

• Lower margin requirement: Crude oil mini contracts are 1/10th the size of regular contracts. Since the lot size is smaller, the margin requirements are correspondingly lower. At the current rates, crude oil mini contracts have a margin of about Rs. 17,000. A footnote in small font: Margin changes as price changes.
• Flexibility of trading: Smaller lot sizes give trading flexibility. For example, based on your risk management rules, you arrive at an ideal position size of 60 units. Now, if a contract of only 100 units is available, you may have to let go of the trading opportunity or maybe overtrade. However, with smaller lot sizes, you can customise your trading position.
• Exiting the position: Suppose you want to book profit in only 50% of your position. Again in such cases, mini lots come handy. For example, if you hold a position of 100 barrels of crude oil mini, you could exit 50 barrels and continue holding the balance 50.

What makes crude prices tick?
The crude oil mini lots have apparent benefits and look like an attractive trading proposition. However, you must know the factors that make crude oil prices move for trading in crude oil. Here is a quick list:

• OPEC output or supply
  The OPEC countries control nearly 75-80% of the world’s proven oil reserves. So any decision regarding production or price by OPEC impacts crude oil prices.
• US crude inventories
  The US inventory data is announced every week. For your quick reference: More than expected inventories -> Weak demand -> Bearish for Crude prices
  Less than expected inventories -> Strong demand -> Bullish for Crude prices. Most economic calendars available on the net provide these data points.
• Weather conditions
  A hurricane in the Gulf of Mexico could impact offshore oil production and thus trigger volatility in crude prices. Finally, given the sensitive nature of oil prices, global geopolitics also plays a significant role in the movement of oil prices.

This was a quick overview of the crude oil and the recently launched mini contracts. To trade crude oil minis login to Upstox App.