Administered pricing system, healthy refining margins and a general aversion towards taking risk has kept Indian oil marketing companies (OMC) away from trading on the commodity exchanges. In fact, the OMCs feel that it is the government?s prerogative to hedge against fluctuations in crude oil prices.
Though commodity exchanges provide a scientific price-discovery platform, domestic OMCs have hedged less than 0.1% of their inventories, that too on a testing basis. And, after testing waters, most have kept away. ?Refiners are not exposed to the markets, so we cannot lock our refining margins on commodity exchanges and risk our premium,? says a senior Indian Oil official.
?Instead of individual companies hedging against crude oil price fluctuations, the government should do it, as in the case of Mexico, Latin American and African countries. Even the World Bank has advised to that effect,? the official added.
Internationally, with every change in crude oil prices, the products prices also move correspondingly. Thus, exporting units have their refining margins intact. ?We have declared ourselves as an export-oriented unit and all our petroleum products are exported. In the international market, with every change in crude oil prices, the product prices also change, keeping our margins intact. So we do not feel the need to hedge against fluctuations in crude oil prices,? said an official at Reliance Petrochemicals.
The administered pricing system of petroleum products has so far buffered public Indian OMCs from crude oil price rise. Every time the subsidy burden becomes too heavy, the government releases oil bonds into the markets. The funds thus accrued go into financing the operations of the public OMCs.
?As the government is bearing the subsidy on oil products, it should take the lead and hedge some of the burden on commodity exchanges,? says a senior officer of multi commodity exchange (MCX). The daily turnover of crude on the Indian commexes is close to 5 billion barrels a day, or twice the daily volume of the barrels that are imported. However, participants have been limited to arbitragers and daily traders.
?While there is enough liquidity in the markets, the depth is lacking. This is because large players are not hedging. Hedging on Indian commexes would also save exposure to the dollar-rupee exchange rate, as the contracts would be rupee denominated,? the MCX official said.