Investing in Crude Oil in India

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Oil prices have made headlines since the Russia-Ukraine War. Russia’s oil production declined in April. Oil prices have risen significantly since the start of the war. Economic sanctions on Russian oil and tighter supply have led to soaring oil prices. Amid the potential shutdown of Russian oil, OPEC has not agreed to raise production to boost supply despite increasing demand. The market sentiment indicates that crude oil prices have a bullish outlook.

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However, crude oil prices have slid sharply from a month ago, which indicates that investors might buy the dip in crude oil prices. Crude oil prices have fallen due to weaker projections for global economic growth and hawkish Federal Reserve policy that underpins a stronger dollar. However, crude oil is one of the most volatile commodities, and investors should be wary of the risks of the alternatives to investing in crude oil.

Oil consumption and production take a while to adjust. A sharp decline in demand due to Covid-related restrictions or a supply shortage due to European economic sanctions on Russian oil can wreak serious havoc on the oil markets. These disruptions can lead to volatile trading. Oil prices must move more to rebalance markets during these disruptions.

There are several ways to invest in crude oil. Investors can purchase crude oil exchange-traded derivatives, futures and options, sector mutual funds, and energy equities. Investors must understand how to invest in crude oil in India to understand the factors that impact trading and to get involved in trading.

India Purchased More Crude Oil Since the Ukraine Crisis

India is the third-largest consumer of oil behind the United States and China. European sanctions on Russian oil have caused crude oil prices to decline. Urals crude from Russia has been set at record discounts, which has been appealing to a country like China and India. As India finds ways to import more oil, investors might seek to find out where to invest in crude oil.

How to Invest in Crude Oil in India

Price gains and losses happen quickly in the volatile oil market. Supply shortages and sudden dips in demand can impact trading. Investors need to understand how they can get exposure to a crude oil investment and where to invest in crude oil. Investors find it challenging to get direct exposure to crude oil in the Indian markets. In India, investors have to buy shares in specific oil companies such as Oil India, ONGC, or energy funds including DSP and Natural Resources Fund. India has a lack of good local options for investing in crude oil.

Where to Invest in Crude Oil in India

Crude oil is traded in the futures market in India. To purchase crude oil, investors have to open a demat account, which is a mandatory process to store securities in digital format. Crude oil is traded on the MCX, the Multi Commodity Exchange of India. Investors can place their order through their broker, or they can buy and sell crude oil themselves if they have an account. Crude oil prices are determined by international oil prices and rupee to dollar rates. If crude oil prices rise in the international markets, crude oil prices will likely rise in India. Additionally, if the rupee declines relative to the dollar, then crude oil prices in India will rise.

Investing in Crude Oil

Investing in crude oil can be in the form of crude oil ETFs that have become more common in recent years among investors who are not willing to take the risk of trading volatile oil futures. Crude oil ETFs track the performance of the crude oil index. Crude oil futures are frequently in contango, which means that the futures price is higher than the spot price and the asset price is expected to rise over time. Commodities ETFs like the United States Oil Fund (USO) have to pay up-to-roll expiring futures contracts into the next month.

In addition to ETFs, investors can gain exposure to crude oil through equity ETFs, energy stocks, and mutual funds. XLE, the Energy Select Sector SPDR Fund, represents energy stocks in the S&P 500 index. XLE includes Exxon Mobile and Chevron, two of the largest integrated oil companies that make up over 44% of XLE’s portfolio. Another ETF to consider investing in is XOP, the SPDR S&P Oil and Gas Exploration and Production ETF. XOP contains US oil and gas producers and excludes crude refiners.

Investors can also purchase mutual funds focused on energy such as Vanguard Energy Fund Investor Shares (VGENX) and Fidelity Select Energy (FSENX). Mutual funds that are focused on oil and energy invest exclusively in that sector through exposure to companies related to energy.

The Bottom Line

Since the Russia-Ukraine War, crude oil prices have surged due to supply shortages and increased demand for oil. European economic sanctions on Russia caused a dearth of supply, while there has been heightened global demand for oil. Investors should be aware of the volatile trading in the oil market due to price swings from large-scale disruptions. Investors who want to gain exposure to crude oil have several options.

In India, it is difficult for investors to get direct exposure to the crude oil markets. Investors need to know how to invest in crude oil in India. Investors have to purchase shares of specific oil companies or open a demat account to purchase crude oil futures. Investors who have an account can purchase or sell futures, or they can do it through a broker. Investors in India often turn to the international markets through their brokerage accounts. The global markets provide a plethora of options to incorporate crude oil into investors’ portfolios. Investors can gain exposure to crude oil ETFs and energy ETFs like XLE or XOP which contain some of the largest integrated oil companies and oil and gas producers. They can also invest in energy stocks. Finally, investors can gain exposure to crude oil through energy-focused mutual funds such as Vanguard Energy Fund Investor Shares and Fidelity Select Energy Fund.

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