The National Commodity and Derivatives Exchange of India Ltd (NCDEX) has finally corrected the weak link in its list of products for trades.In a move that would help Indian oil companies to hedge their risk in a more cost-effective way, NCDEX has joined hands with International Petroleum Exchange (IPE), Europe’s energy futures and options exchange, to trade in rupee-denominated Brent crude futures.Here’s how it works: IPE will provide its prices on a real-time basis to all the 6,500 trader terminals in India. The rupee-denomiated Brent crude contracts on the NCDEX will be priced and settled with reference to IPE Brent crude index. The contract will have a trading lot of 100 barrels and will be settled on its monthly expiry date.It is significant to note that Multi Commodity Exchange of India (MCX) already trades in crude oil and Brent crude future contracts. MCX pegs its prices with New York Metal Exchange (NYMEX). In fact, the MCX has registered a record total turnover of Rs 4,210 crore on July 8 with crude oil contracts registering a turnover of Rs 2,189 crore for 84,48,000 barrels with significant open interest.However, oil refinary companies are yet to take advantage of these crude future contract.‘‘We have not yet started hedging our risks on the Indian commodity exchange yet. But if it matches our requirements we will definitely look into it. At present we hedge our risk over the counter (OTC) with bankers and multi national companies,’’ said Sumita Bose Roy, general manager, international trades, BPCL.Adds an official from Essar: ‘‘Our refineries will start functioning only from next fiscal year. However, we will always keep our options open for any best deals either in India or abroad.’’The first Brunt crude contract on NCDEX will be available for trading latest by mid-September. Trade timings will be from 10.00 am to 11.30 pm. While NYMEX registers good volume in crude sweet, IPE commands authority as far as Brent crude is concerned. ‘‘Though crude prices depends on demand and supply system, the present NCDEX tie-up with IPE will help in good price discovery for Brent crude,’’ says Sushil Sinha of Geojit Securities.In a bid to curb speculation, forward market regulator Forward Markets Commission (FMC) will prescribe an outer limit to launch the contract. ‘‘If FMC fixes the amount and trading lot that can be entered into a contract it will eliminate speculators who jack up prices unnecessarily. This move is in the right direction,’’ adds Singa.Given the huge price fluctuation of crude prices abroad, which has recently tested $70 level, the crude future contracts on Indian commodity exchanges has come as a great opportunity for Indian oil companies to cover their risk. Of the total crude imports, Brent crude alone accounts for 43 per cent while rest accounts for sour crude from Dubai and Oman.Among the various crude produced, Brent gains significance as two-thirds of the world’s internationally traded crude oil prices are decided based on Brent supplies. In India, prices of most of the crude varieties consumed by the refineries are benchmarked to Brent prices.Now with an hedging tool available in domestic market, crude producing companies like ONGC and Oil India can protect their prices by entering into sell contracts. And refiners including Indian Oil Corporation, HPCL, BPCL, MPRL and Reliance Industries can enter into buy contracts to protect their input cost. ‘‘On an average, BPCL hedges about 10 per cent of their total crude input requirement which works out to 1 million tonnes,’’ says Roy.Other crude consuming sectors like petrochemicals, plastics, textiles can also hedge their price risk as their final product prices are correlated with crude prices. The transport sector can also take advantage of the new crude future contract.
