You may be trading in stocks of IOC, ONGC, Reliance and BPCL. The prices of stocks of these companies are largely influenced by crude oil price movement as they are oil exploration and oil marketing companies. As stock price movement of energy companies is linked to crude oil prices, there is a significant opportunity to trade in crude oil at the Indian commodity exchange. In the following paragraphs, we will discuss crude oil derivatives trading in India. We will also briefly touch upon natural gas and its trading.
Natural gas
Natural gas—one among several energy products—is traded in the United States and Northern Europe. It has wide usage in sectors such as power generation, for residential heating and cooling, and industrial and commercial purposes. The price movement of natural gas is driven by factors such as supply, demand, and weather conditions in the United States and Europe.
Natural gas is a clean fuel, producing 30 to 40% less carbon dioxide than petroleum and coal when burned. Compressed Natural Gas (CNG) is a popular fuel for public transportation vehicles. It is also used as a starting material in the production of ammonia, antifreeze, textiles, glass, steel, polymers, and paint.
Natural gas is used in power generation and this sector accounts for 37% of total consumption followed by the industrial sector, accounting for 27%; residential use is at 16% and commercial at 11%. It is measured in British Thermal Units (Btu) for pricing purposes. One Btu is the amount of natural gas that will produce enough energy to heat one pound of water by one degree at normal pressure.
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Did you know?
NYMEX, a division of the CME Group, is the world’s largest exchange for trading of crude oil and natural gas.
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Natural gas prices are majorly driven by two factors, namely heating demand and cooling demand. Heating demand for natural gas comes from residential and commercial sectors during extreme winter. Cooling demand in natural gas means when power generation sectors consume natural gas for extra electricity generation during extreme summers.
Crude oil Futures trading in India
Crude oil Futures trading started on MCX with its inception in 2003. In recent years, crude oil derivatives are generating highest volumes on Indian exchanges. Following are the different investment instruments of crude oil on Indian exchanges.
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Did you know?
The energy segment is the highest volume generator at MCX.
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You can trade in crude oil through the following:
- Crude Oil Futures
- Options on Crude Oil Futures
- Energy Index – ENRGDEX – consisting of crude oil with 51% weightage and natural gas with 49% weightage
* The ratio is as of the year 2022, Source: Petroleum Planning and Analysis Cell
Energy Futures contract specifications – MCX
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Product/Parameter
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Crude oil Futures
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Natural gas Futures
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Trading/Delivery unit
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100 barrels
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1,250 MMBtu
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Price quotation
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Rs. /Barrel
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Rs. /MMBtu
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Settlement
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Cash settlement
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Cash settlement
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Expiry date
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19th/20th of calendar month
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26th of calendar month
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Tick size
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Rs. 1.00
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Rs. 0.10
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Initial margin*
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30%
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20%
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Extreme loss margin*
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1.25%
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1.25%
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* Initial and extreme loss margins may vary as per MCX guidelines
In energy Futures like crude oil, natural gas and ENRGDEX, apart from initial and extreme loss margins, at times, SEBI/MCX may require additional margin also known as pre-expiry margin. This pre-expiry margin is often required by SEBI/MCX in response to high volatility in energy commodities. The pre-expiry margin safeguards a trader and member broker from an unforeseen situation in an event of abnormal price fluctuations in energy commodities.
The following table provides a better understanding of pre-expiry margins.
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Commodity Futures
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Tentative expiry date*
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Normal margin requirement *
(A)
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Additional margin requirement
as per SEBI circular*
(B)
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Tentative margin requirement
as on the expiry day
(A+B)
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Crude oil
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16th- 21st
of a month
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30%
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25%
(additional 5% per day * 5 last trading days till expiry date)
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55%
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Natural gas
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24th- 27th
of a month
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20%
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25%
(additional 5% * 5 last trading days till expiry date)
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45%
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ENRGDEX
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8-10th
of a month
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12%
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NA
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12%
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*Please note, actual margins in Crude Oil, Natural Gas and ENRGDEX may vary as per prevailing margin guidelines issued by SEBI/MCX. Margin percentage used here is for illustrative purposes only. Expiry date mentioned here is tentative and actual expiry dates may vary. Please refer to MCX contract specifications for actual expiry dates.
Options contract specifications - MCX
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Parameters
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Crude oil
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Natural gas
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Underlying
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MCX Crude Oil Futures
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MCX Natural Gas Futures
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Expiry day
(Last trading day)
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2 business days prior to expiry of underlying Futures contract
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2 business days prior to expiry of underlying Futures contract
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Underlying quotation / Base value
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Rs./100 Barrel
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Rs./MMBtu
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Strikes
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40 In the Money (ITM), 1 near to Money (NTM), 40 Out of the Money (OTM) strike prices
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30 In the Money (ITM), 1 near to Money (NTM), 30 Out of the Money (OTM) strike prices
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Strike price intervals
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Rs. 50
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Rs. 5
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Tick size
(Minimum price movement)
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Rs. 0.10
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Rs. 0.05
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Settlement
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On expiry of Options contract, the open position shall devolve into underlying Futures position as follows:
- Long Call position shall devolve into long position in the underlying Futures contract
- Long Put position shall devolve into short position in the underlying Futures contract
- Short Call position shall devolve into short position in the underlying Futures contract
- Short Put position shall devolve into long position in the underlying Futures contract
All such devolved Futures positions shall be opened at the strike price of the exercised Options
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Source: MCX
Contract specifications of ENRGDEX
Another watershed moment in India's commodities derivative trading history was the introduction of commodity based indices. The energy index known as, ENRGDEX, is a blessing in disguise for commodity traders in India as it captures both individual and collective movements of crude oil and natural gas, making it the most effective trading tool for retail participants. ENRGDEX is a sectoral index consisting of crude oil and natural gas with an approximate weight* of 51% and 49% respectively. The biggest advantage of ENRGDEX is lower margin compared to combined margin required on Futures contracts of crude oil and natural gas.
* The ratio is as of the year 2022, Source: Petroleum Planning and Analysis Cell
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Parameters
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Description
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Underlying
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MCX iCOMDEX ENERGY
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Expiry day
(Last trading day)
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One business day prior to the start of rollover period in the underlying constituent/(s) index
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Underlying quotation/Base value
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Index points
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Tick size
(Minimum price movement)
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Rs. 1
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Trading unit
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Rs. 125 * MCX iCOMDEX ENERGY
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Settlement
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Cash settlement
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Summary
- Energy products—crude oil and natural gas—are the most important spokes in the wheel of global economic growth.
- Supply demand imbalance in energy products may derail the global economic engine to some extent.
- Indian traders are allowed to trade in crude oil and natural gas through Index, Futures and Options.
- Indian energy derivatives are cash settled contracts, while on the global platform, similar contracts are deliverable in nature.
In the next chapter, you will be introduced to another important commodity segment i.e., Base Metals, that also play a vital role in our life and economic growth. MCX allows trading in five base metals, namely, aluminum, copper, lead, nickel, and zinc.
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