Chapter 10: Crude Oil and Natural Gas – Part 2

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.

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.

You can trade in crude oil through the following:

1. Crude Oil Futures
2. Options on Crude Oil Futures
3. 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

* 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.

*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

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

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.  

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. Such representations are not indicative of future results. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.