Glossary: 20 key terms to know about commodity trading

1. OPEC

Formed in the 1960s, the Organization of the Petroleum Exporting Countries (OPEC) is the largest supplier of crude oil, accounting for more than 80% of the entire world’s oil reserves. The OPEC initially started off with just 5 member countries - Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Currently, the OPEC consists of 15 members and includes African and other middle eastern countries like Kuwait, Saudi Arabia, and the UAE.

2. Non-OPEC

In addition to the members of the OPEC, there are several other countries that also produce oil. These include Brazil, Canada, Russia, Mexico, and Norway, among others. These countries are commonly referred to as Non-OPEC countries.

3. Upstream companies

Companies that are involved in exploration, identification, and extraction of crude oil are commonly referred to as upstream companies. Since this process is extremely capital intensive, upstream companies are generally very asset-heavy and have a huge capital expenditure budget. Reliance Industries, ONGC, and Cairn India are a few examples of upstream companies in India.

4. Midstream companies

The midstream companies are the ones involved in storage of the crude oil extracted by the upstream companies, and in the transportation of that oil to the downstream companies for further processing and refinement. The transportation happens via three primary channels - pipeline, oil tankers, and ships.

5. Downstream companies

Companies that are involved in refining the raw crude oil into various petrochemical products are commonly referred to as downstream companies. Many downstream companies don’t just stop with simply refining crude oil. They get involved in the marketing and distribution of their products to other businesses and individuals as well. BPCL, HPCL, and Indian Oil are a few examples of Indian downstream companies.

6. Brent Crude

Brent Crude is essentially a blend of different crude oils from multiple oil wells. It has low sulphur content (around 0.37%) and an API Gravity level of 38.06. The crude oil derivative contract that you see on the MCX website is based on the Brent Crude since it is widely considered to be the international benchmark for crude oil. 

7. West Texas Intermediate (WTI)

The characteristics of the WTI are much better than Brent Crude. It has a far lower sulphur content (only around 0.26%) and has an API Gravity level of 39.6. This makes WTI a far superior crude oil variant to Brent Crude. The WTI is extracted from oil wells in the U.S.A., which is quite evident from the name itself. It is traded exclusively on U.S. exchanges and is not available in India.

8. Crude oil: Price crash of 2020

In view of the COVID-19 pandemic during the year 2020 and the ensuing lockdowns enforced by multiple nations, the demand for crude oil took a deep plunge. At around the same time, a price war was raging between two of the largest crude oil producers - Russia and Saudi Arabia.

Both of these situations led to a situation where the supply of crude oil significantly overshot the demand. Since there was little to no disruption in the supply and very little demand, the oil prices crashed and went deep into the negative territory. The futures contract price of West Texas Intermediate (WTI) came down heavily from around $17 to around -$35 per barrel. Similarly, the Brent Crude oil prices also took a hit and plummeted down from around $70 to around $9. 

9. Silver futures contract

The silver futures contract is the regular derivative contract of this metal.  It is a derivative with the silver commodity as the underlying. It has a lot size of 30 kilograms, a tick size of 1 rupee, and a maximum order size of 600 kilograms. The contract availability is 5 contracts at any given time.

10. Silver mini futures contract

The silver mini contract was introduced in a bid to encourage retail participation in the derivative contracts of silver. It is also a derivative with the silver commodity as the underlying. It has a lot size of 5 kilograms, a tick size of 1 rupee, and a maximum order size of 600 kilograms. The contract availability is 5 contracts at any given time.

11. Silver micro futures contract

Created especially for small investors and traders with low investment capitals, the silver micro is even more pocket-friendly. It has a lot size of 1 kilogram, a tick size of 1 rupee, and a maximum order size of 600 kilograms. The contract availability is 4 contracts at any given time.

12. Crude oil futures contract

The crude oil futures contract a derivative with crude oil as the underlying. It has a lot size of 100 barrels, a tick size of 1 rupee, and a maximum order size of 10,000 barrels. The contract availability is 6 contracts at any given time.

13. Copper futures contract

The copper futures contract a derivative with copper as the underlying. It has a lot size of 2,500 kilograms, a tick size of 5 paise per kilogram, and a maximum order size of 70,000 kilograms. The contract availability is 5 contracts at any given time.

14. Aluminium futures contract

The aluminium futures contract a derivative with aluminium as the underlying. It has a lot size of 5,000 kilograms, a tick size of 5 paise per kilogram, and a maximum order size of 1,50,000 kilograms. The contract availability is 5 contracts at any given time.

15. Lead futures contract

The lead futures contract a derivative with lead as the underlying. It has a lot size of 5,000 kilograms, a tick size of 5 paise per kilogram, and a maximum order size of 1,00,000 kilograms. The contract availability is 5 contracts at any given time.

16. Nickel futures contract

The nickel futures contract a derivative with nickel as the underlying. It has a lot size of 1,500 kilograms, a tick size of 10 paise per kilogram, and a maximum order size of 24,000 kilograms. The contract availability is 5 contracts at any given time.

17. Cotton futures contract

The cotton futures contract a derivative with cotton as the underlying. It has a lot size of 25 bales, a tick size of 10 rupees, and a maximum order size of 1,200 bales. The contract availability is 6 contracts at any given time.

18. Mentha oil futures contract

The mentha oil futures contract a derivative with mentha oil as the underlying. It has a lot size of 1,080 kilograms, a tick size of 10 paise, and a maximum order size of 18,000 kilograms. The contract availability is  6 contracts at any given time.

19. Natural gas futures contract

The natural gas futures contract a derivative with natural gas as the underlying. It has a lot size of 1,250 mmBtu, a tick size of 10 paise, and a maximum order size of 60,000 mmBtu . The contract availability is 3 contracts at any given time.

20. Commodity options

Commodity options are derivative contracts that have either the commodity, or the commodity future, as the underlying asset. So, in case of commodity options with commodity futures as the underlying, you receive the futures contract of the relevant commodity upon expiry.