Govt allows futures trading in crude, petro products

The decision also assumes significance in view of the proposed deregulation of oil sector by the year 2002 through phased dismantling of the Administered Price Mechanism (APM). India allowed futures trading through international commodity exchanges for the first time in September 1998, but crude and petroleum products were excluded from the list which included coffee, castor oil, groundnut oil and pepper.

The steep hike in oil prices in recent weeks would force India to shell out over $ 17 billion to import about 78 million tonnes of crude and over 2.5 million tonnes of petro products as against $ 12.8 billion in 1999-2000, industry sources said.

Presently, futures trading is permitted in various agriculture commodities including coffee, castor oil, groundnut oil and pepper.

The Petroleum Ministry had come up with the proposal some time back on the basis of the recommendations by an empowered officials’ committee following suggestions from a Parliamentary Standing Committee nearly two years ago.

However, in view of India’s high dependence on procuring crude from the Gulf (Dubai crude), trading would be probably permitted with a price cap to limit liabilities, if any, sources said.

As per the proposed scheme, the companies would be allowed to fix a futures’ price in their tenders mainly for Gulf crude as it is not traded at the London and New York futures exchanges, sources said. When contacted, oil ministry sources indicated that the proposed scheme would incorporate highly sophisticated instruments of trading like derivatives, hedging etc while shunning over-the-counter futures to limit risks.

Cautioning that futures trading entailed probability of both gains and losses for the players, ministry sources said India should have resorted to it some time back in view of the imminent opening up of the oil sector and dismantling of Administrative Pricing Mechanism by the year 2002.

Some of the private sector companies are believed to be hedging their risks through their international partners and their overseas ventures and the trend is on the increase with forthcoming partial decontrol of the sector, oil industry sources said.

On the contrary, the oil PSUs are at a disadvantage because of their very structure and even their overseas accounts are operated as per conformity with the RBI guidelines, they added. More than half of India’s imports are sourced from the Gulf region while about 40 per cent comprise of African coast and Brent variety, sources said.

The oil companies would possibly use the futures’ instrument for both their long-term contracts as well as their monthly tenders, they added.