With the country?s annual crude oil imports being in excess of 1 billion barrels, India?s answer to volatile crude oil prices could be to effectively hedge its import needs on the global bourses and take advantage of falling prices. A suitable hedging mechanism against crude oil prices can also prevent any escalation in local costs due to a sudden spike.
The National Collateral Management Services (NCMSL) has been pressing the government to institutionalise a mechanism for sovereign hedging of crude oil. In a recent presentation to the petroleum ministry, NCMSL has strongly advocated for the government to effectively participate in global bourses to hedge its crude oil needs, more so in view of possible escalation in future.
NCMSL, promoted by National Commodity and Derivatives Exchange (NCDEX) along with leading private and public sector banks like Bank of India, Canara Bank, Punjab National Bank, HDFC and Yes Bank works to empower stakeholders in commodities to deal with associated risks.
Crude oil prices in global and local markets have shed close to 50% since May and are currently ruling at around $65-70 a barrel, much lower than its all-time high of $147 a barrel seen in May.
NCMSL has suggested that in view of India?s large dependence on global imports and massive pressure exerted by volatile crude prices on the country?s exchequer in the recent past, it is requested that the government may expedite the process of instituting a suitable hedging mechanism against crude oil prices at the earliest.
?The recent sharp fall in crude oil prices is mainly attributed to massive de-leveraging of the existing positions by global financial institutions and the same is expected to continue for some time in near future, however it is also expected that the production cuts (Oil-cartel OPEC recently decided to trim their daily output by 1.0 million barrels) may counter any sharp falls, of any, from the existing level,? the presentation said.
NCMSL was also instrumental in suggesting a hedging process for wheat in global commodity bourses like Chicago Board of Trade (CBOT) to the government in 2006 to manage risks due to wide fluctuation in prices. The suggestion was made when India was in process of importing around 7.3 million tonnes of wheat to overcome a local procurement shortage.
Sources said the agency made a detailed presentation to the ministry on the benefits of hedging in international exchanges, how India can do and what can the possible fallout of this.
?The ministry seems interested in the process as it is beneficial for all stakeholders in the whole energy economics of India,? an official who was directly involved in the process said.
Petroleum ministry has also sought the views of its oil companies on the issue. Indian Oil Corporation had told the petroleum ministry that as the Government controls the prices of sensitive petroleum products, hedging crude oil price could pose considerable risks. As per IOC, hedging of the entire volume of crude oil by the Government will have huge financial implications that will run in billions of dollars.
On its part, HPCL had however supported NCMSL?s proposal and had advised the petroleum ministry to consider the suggestions by NCMSL. HPCL has also suggested setting-up of a Committee on the lines similar to the ?Empowered Committee on Wheat? to facilitate identification of suitable hedge instruments, undertake necessary market development and smooth execution of the transactions in an utmost discreet manner.