Sebi in final stages of allowing futures trading in petrol and diesel

Over 60,000 retail petrol pump and hundreds and thousands of small and big transporters, bulk users and diesel-consuming industries will soon be able to hedge the price risk in petrol and diesel, as Sebi is in final stages of allowing futures in these two commodities.

ICEX, the third largest Commodity Exchange, has urged the regulator to allow futures trading in petrol and diesel. Unlike crude oil, the prices of these two products derived from the fossil fuel are fixed in India once a day by oil marketing companies, based on market forces. Hence hedging is more real than the proxy. So far, crude oil has been a proxy hedging product for petrol and diesel and not an accurate risk management tool.

Sanjit Prasad, MD & CEO of Indian Commodity Exchange (ICEX), sais, “In the Commodity derivatives market today, there is a paucity of serious hedgers participating from across the country due to basis risk. Our proposed contracts for petrol and diesel have been designed to eliminate basis risk for participants or hedgers anywhere in the country. It will be the first truly One India-One Market-One Contract product.”

Hedgers are active in contracts that are near to reality, in which prevailing prices in India have a high correlation with their benchmark price. Gold and silver have domestic price-based settlements and hence their hedging and delivery levels are better than those of other non-agri contracts. Metals and energy products are only cash settled.

ICEX’s proposed petrol-diesel contracts are cash settled only because these commodities aren't allowed to be stored by users. Most contract and other fleet operators have arrangements with petrol pumps for the supply of diesel and quite often the price is also part of the contract. If the average price during contract period is higher than the contracted price, the pump owner is a loser as he has no instrument to hedge price risk.

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

For petrol, Singapore MoPS gasoline (petrol) price or Mean of Platts (a McGraw-Hill Group company) Singapore price is considered. Platts announces 4.30 p.m. Singapore or 1.30 p.m. India time. Oil marketing companies take the FOB price, add freight and other charges, convert in rupees at RBI reference rate and then add marketing cost and margin. These variables fluctuate by 1.5-4.5 per cent or 80 paisa to Rs 3.5. Platts polls these price and also use rates from its reporting platform, on which large global refineries report their deals.

For diesel, Platts provides Arab-Gulf price of diesel at Fozura port and Indian Oil Marketing companies arrive at the local price based on the Fozura price.

Petrol and diesel futures will serve as a perfect hedge for pump owners, who pay advances to get supplies, and for whom price movements beyond their calculations are becoming a burden.

For generating liquidity, both the above prices are announced in Singapore daily and Indian rates are fixed for next day morning. Hence by 4.30 p.m. India time, these prices could act as forecasts for the next-day domestic price. Indian petrol and diesel prices have 94-95 per cent correlation with the FOB price derived from the Singapore rates. That kind of correlation is diminished in the case of crude oil.