India keeps date with its own oil futures trading

The Multi Commodity Exchange (MCX) on Wednesday launched futures trading in crude oil in the country. Now, domestic oil producing and refini...

The Multi Commodity Exchange (MCX) on Wednesday launched futures trading in crude oil in the country. Now, domestic oil producing and refining companies can finally hedge against price fluctuations on the crude they buy.

The oil futures trading comes within one month of the Asian buyer and seller meet, which had focussed on the necessity to develop an Asian oil market. Launching the trading, Petroleum Minister Mani Shankar Aiyar said, ‘‘This step is crucial for our oil economy and a movement towards developing an Asian oil and oil product market.’’

While energy futures markets in the US and Europe trade many times their underlying oil production and consumption, the need for active energy futures instruments is still felt to a large extent in the Asia-Pacific.

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In fact, the concept of an Asian marker as opposed to Brent and US light crude, can only materialise if an Asian market with active trade evolves. For this, derivatives and futures are a must, as was pointed out by some of the major Asian sellers in the mini-Opec meet in New Delhi in January.

MCX started off with just the first-month April contract and will introduce May and June contracts later. Only three monthly contract months will trade concurrently at any given time, MCX CEO Anjani Sinha said.

MCX contract for West Texas Intermediate (WTI) (an important member of the US light crude) with 0.42 per cent sulfur and 37-42 degrees API will be traded in 100 barrels lots and will be denominated in rupees per barrel. The contract price will exclude import and other taxes. As the contracts will expire on the 15th day of the previous month, the April contract will go off the board on March 15.

The exchange will allow a 4 per cent price deviation in a day’s trading and has a 5 per cent margin requirement. MCX officials said the government should allow foreign companies to trade in the exchange, which deals in 41 commodities and has a daily average turnover of Rs 2,000 crore.

However, product futures is yet to take off in the country. As M.S. Ramachandran, CMD of IOC, said, for end users to benefit more, futures in products need to be introduced. He also said futures contract linked to Brent, Oman and Dubai crudes too should be introduced besides the present one that is liked to US WTI.

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Describing the futures as a big leap, S. Behuria, CMD of BPCL, said till date there was no mechanism of price discovery of domestic crude oil and refined products. This is finally possible, he added.

A note of caution was raised by industry experts who said the regulatory framework should differentiate between hedging and speculation. ‘‘The Forward Markets Commission should take a note of this issue,’’ Ramachandran added.