Getting Slippery

What does this mean in the Indian context where the interest in crude — the second mostly highly traded commodity in the world — has just started seeing an upsurge? ‘‘The stock positions as announced by the US Federal Reserve look equipped, while the consumption is increasing in China and Asia,’’ says Joseph Massey, deputy MD, Multi Commodity Exchange (MCX), India.

Attributing the geo-political hostility for the pressure on crude in April contract in the markets abroad, he adds: ‘‘The peak is easing out and it has fallen down to around $48.03, which means the pressure for now is easing,’’ he adds. Domestic prices of crude are a fallout of international events both economic and geo-political.

MCX at present is the only platform where future trading in crude takes place. Since it was introduced in February 9 this year, the volumes have actually doubled with the crude accounting for 20 per cent of their entire commodity basket. The difference in crude spot prices and futures crude prices differ by a few cents, analysts say.

The way MCX calculates its futures prices is simple: multiplication of the futures contract as in the New York Mercantile Exchnage with the Indian rupee. Therefore any appreciation or depriciation follows the same trend. Fundamentally, changes in the Russian economy — a major oil player, Opec country’s production capacities and dollar position decides futures trading of crude.

Analysts argue that the trading in crude has eaten into bullion and silver trading over the last few months due to changing sentiment after Opec announced its capacity to sustain crude demand.

Says Sanjay Kaul, director of Indian School of Petroleum: ‘‘Crude is traded in dollars. With the dollar strengthening over the last six months and a depriciating euro and yen, it is going to drastically impact futures trading.’’

Going by statements from various investment banks over the last few weeks the demand may, if not in the near future, very well peak. ‘‘The levels should be low for a while around $48 but the demand can push the price to around $55 in the long term. But then it’s oil, it slips as slippery can be,’’ said an analyst who did not want to be quoted.

National Commodity and Derivatives Exchange (NCDEX) is also working on a crude oil contract which should be ready in the next three months. ‘‘Crude is one commodity which has increased trade deficit and is the largest consumed raw material in major industries,’’ says an NCDEX official. ‘‘It makes sense to hedge the price risk at futures market. Also the Indian corporates who hedge through international exchanges can have a direct interface with domestic trade prices and can go for contracts which will have far immediate reponses,’’ he says.

Adds Kaul: ‘‘Oil prices are always around $10 less in the domestic market. But they are highly volatile as the government has to consider the import equation due to the dollar threat along with various political and trade tariffs.’’

For a commodity that slips with every change in any global event, futures trading would be advisable if one can take the risk under the assumption that the price band may rise. But that is a million dollar question nobody can answer ever.

OIL FUTURES TRADING IN INDIA

• Average daily traded volume — 9,12,000 barrels per day

• Average daily traded value— Rs 200 cr

• Record volumes on May 4 — 12,89,800 barrels valued at Rs 283.15 cr

• Current size of crude oil market in India — 2.2 million barrels per day

• 70 per cent of India’s requirement met through imports