It was back in 2019 when I had already tried options trading, had traded in gold and silver and somehow got a desire (and confidence) of trading in crude oil. Silver had already taught me about how volatile commodity prices could be. But the desire to earn more, with less capital, attracted me towards crude. Another reason was the trade timing, I couldn't give much time to trading in cash segment due to workload at office and had a lot of time to spend with myself after coming back. So, why not utilise it for commodity trading, the markets were open till midnight.
On an evening of October 2019, I returned from office, had some amount in my trading account, was exploring commodity segment and just randomly bought crude oil mini. Goal was to book small profit and have an idea of how crude oil prices fluctuate. Luckily, I booked a profit of Rs. 1,170 that day. The other day, in the same month, I tried my hands at Natural Gas and realised a loss of Rs. 2,100. Following the losses (and partly because of the workload), I restricted myself from trading in commodities for the next few months.
In February 2020, while surfing the internet I came across an article covering ongoing price war between Saudi Arabia and Russia over crude oil. Oil prices were already down as corona virus had started spreading across countries and there was a fear of reduced demand in future. It felt as the best time to buy put options - assuming that price war will further lower crude oil's prices (Frankly speaking, to me, covid-19 didn't seemed like a serious event affecting crude, at that time. Also, I couldn't anticipate that something like lockdowns could happen). Trades went well, I made a profit of around Rs. 14,000 in the last week of Feb and first few days of March.
Then the news of OPEC and Russia agreeing for a discussion on oil production cuts came in and considering that the demand is going to fall in future, it appeared as a much needed step. I read a few commentaries by market experts where they had written how Russia had created similar situations before and then agreed for production cuts. It sounded logical as well, why would a country increase its production if it is anticipating lesser demand in future. So, a couple of days before this discussion, I bought call options. There were dip in prices during these two days which I thought of as operators' strategy and considered it as a buying opportunity.
I kept on buying and by 8th March, had accumulated 1100 quantities of crude oil futures. I had the (over) confidence that Russia will agree to the production cuts leading to rise in oil prices.
But, the discussions didn't work out and Russia as well as OPEC said they will raise their production levels. Russia had stated that they can cope with low oil prices for 6-10 years but would not reduce their output.
The day witnessed biggest daily rout since the 1991 Gulf war and crude oil prices crashed by 25% in a single day. I was left with no other option than realising losses - Rs. 34,000.
We all know what happened next. By first week of April 2020, most of the nations announced lockdown, leading to a steep fall in demand for oil. For the first time in the history, oil prices went negative, at -$37 a barrel. There was shortage of space to store the oil being produced or already produced.
For me it may be a minor loss but thinking of the companies and the economy as a whole, for them the volume of losses was significantly high.
I used to consider these losses as a training fee paid for a real life experience 😀. So, what I learned from it:
1. Trading in commodities such as gold, silver, oil etc. requires you to be much more vigilant and up to date with all global events, including geo-political conditions.
2. Outcome of an event may not always be logical. Like in this case, countries were aware that increased production levels will lead to higher supply compared to the demand and will lower the oil prices.
3. Not all dips are a buying opportunity. You may have heard people saying that dips are an opportunity to accumulate or buy. This may not always be the case.
4. Risk management is important - most of my trades at that time were based on news and articles. I was ignoring the technicals and had no stop loss to limit my losses.
5. You know less than you think you know - Overconfidence could be hazardous.
If you are interested in knowing more about what happened to oil prices in 2020, do read:
