IndianOil plans to start trading on Nymex, manage risk better

IndianOil plans to start trading on Nymex, manage risk better

Mumbai: With oil prices hovering around $100 (Rs3,940) a barrel, India’s state-owned companies are increasing their presence in the oil futures trade to hedge the risk on crude oil price fluctuations.

While the largest of the three Indian state-owned refining companies, Indian Oil Corp. Ltd (IOC), plans to start trading on the New York Mercantile Exchange (Nymex), the other two refiners—Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—are working out a plan to expand their presence on the domestic commodity exchanges.

S.V. Narasimhan, IndianOil’s chief financial officer, said the corporation, which has been losing Rs110 crore a day on account of the subsidy it offers on the prices of petroleum products, such as petrol, diesel, kerosene and cooking gas, is drawing up a plan to start trading on the world’s premier commodity exchange. “We are drawing up a plan for trading on Nymex but no timeframe has been fixed for this yet," Narasimhan said.

A senior BPCL executive, who did not wish to be named, as he is not authorized to speak to the media, said the company would begin trading on the Multi Commodity Exchange (MCX) once the company’s board clears the proposal. It already trades on the National Commodity and Derivative Exchange (NCDEX).

An MCX executive said HPCL was also expected to trade through existing exchange members.

HPCL’s director of finance C. Ramulu, confirmed that trading on both the exchanges was under consideration.

The Indian refiners lose around Rs240 crore a day on the subsidies they give on petroleum products to retail consumers.

The Indian government decides the prices of these products, regardless of the prevailing prices of crude. The difference is borne by the oil producers, refiners and the government in equal proportions. As India is a net importer of crude oil, Indian oil companies have been hit by the rising prices of the commodity.

By tying up future supplies when price of oil is going lower, the refining companies reduce the risk of exposure to a future price rise. For instance, if IOC can tie up the price at which it will buy crude for its January requirements now, the risk it faces of oil prices appreciating further by January would be reduced.

MCX accounts for about 95% of the energy derivatives trade in India. The average daily volumes on MCX has risen from 2.5 million barrels a day in 2005, when the futures where launched, to 5.2 million barrels in October.

On 1 November, crude contracts touched an all-time high of 11 million barrels. The Reserve of Bank of India had allowed oil firms to hedge their inventory risks by trading in oil futures in its quarterly credit policy review on 31 October. IOC and BPCL have been trading while seeking special permission from the banking regulator.

According to Narasimhan, the high volatility in international oil prices is a major challenge for domestic oil majors. He indicated that IOC would supplement its overseas over-the-counter (OTC) derivatives activity with this platform for enhancing and broad-basing its hedging activities.

IOC has saved close to Rs400 crore on its price risk from the trade, Narasimhan added. He, however, pointed out that the depth of trade in the Indian exchanges was limited and that moving to an international exchange would help the company manage its risk better. IOC has been trading on NCDEX since November 2006 and on MCX since September.