FUTURES TRADING IN PETROL, DIESEL WILL BE A REALITY SOON

More than 60,000 retail petrol pumps and millions of small and big transporters, bulk users, and diesel-consuming industries will now be able to hedge the price risk of petrol and diesel as Sebi is in final stages of allowing futures in these two products. The ICEX has proposed to the regulator to allow futures trading in petrol and diesel. Unlike crude oil, oil marketing firms set the prices of these two products once a day and are marketdetermined. RAJESH BHAYANI writes

More than 60,000 retail petrol pumps and millions of small and big transporters, bulk users and diesel-consuming industries will be able to hedge the price risk of petrol and diesel as the Securities and Exchange Board of India (Sebi) is in final stages of allowing futures in these two products.

The ICEX, the third-largest commodity exchange, has proposed to the regulator to allow futures trading in petrol and diesel. Unlike crude oil, oil-marketing companies set the prices of these two products once a day and they are market-determined.

So far crude oil has been a proxy hedging product for petrol and diesel and not an accurate risk management tool.

Sanjit Prasad, managing director and chief executive officer of the Indian Commodity Exchange (ICEX), said: “Today, in the commodity derivatives market, there is paucity of serious hedgers participating from across the country due to basis risk. Our proposed contracts for petrol and diesel have been designed in such a manner that there will be no basis risk for participants or hedgers from even across the country. It will be first truly One India- One Market- One Contract.”

Hedgers are active in contracts that are near to reality and where prices prevailing in India are in high correlation to their benchmark prices. Gold and silver have settlements based on domestic prices and hence in the non agri segment the hedging and delivery levels are better than other non agri contracts. Metals and energy products are cash-settled.

The ICEX’s proposed petrol-diesel contracts are cash-settled because users are not allowed to store them. Most contract and other fleet operators have arrangements with petrol pumps for supplying diesel and often the price is also part of the contract. If the average price during the contract period is higher than the contracted price, the pump owner is the loser because he has no instrument to hedge price risk.

The benchmark price for futures trading will be based on the daily price announced by the oil-marketing company with which the exchange ties up. However, oil-marketing companies set prices based on international prices of gasoline and diesel.

For petrol, the Singapore MoPS gasoline (petrol) price or the Mean of Platts (McGrow Hill Group company) Singapore price is considered.

Platts announces prices at 4.30 pm in Singapore (or 1.30 pm in India). Oil-marketing companies take the FOB (free on board) price of these and add freight, etc and convert it into rupees at the RBI reference rate and add the marketing cost and margin. These variables fluctuate by 1.5-4.5 per cent or 80 paise to ~3.5.

Platts polls these prices and also uses them from its reporting platform where large global refineries report their deals.

For diesel, Platts provide the Arab- Gulf price of diesel on Fozura port and Indian oilmarketing companies come at the local price based on the above price.

Petrol and diesel futures will be a hedging tool with pump owners who pay advance money to get material and price movements beyond their calculations is becoming a burden.

For generating liquidity, both above prices are announced in Singapore a daily and Indian prices are fixed for the morning the next day. Hence by 4.30 pm in India these prices could act as the basis for predicting domestic prices the next day. Indian petrol-diesel prices have 9495 per cent correlation with FOB prices derived from the above prices.