The Securities and Exchange Board of India (SEBI) may soon approve petrol futures to trade in the derivatives market, allowing bulking consumers to hedge against price rise. The petroleum ministry has approved a plan to remove hurdles from the ways for oil futures to trade in the Indian market.
Since CoronaVirus outbreak petroleum prices have seen unprecedented fluctuations in the global market. In the first time in history, the crude oil price in the international market slipped below zero due to lack of demand even as the pandemic caused lockdown in several countries.
India is the largest importer of crude oil, and therefore, the Indian market is highly sensitive to global price changes. However, the recent price rise is the natural outcome as OMCs (Public Sector Oil Marketing Companies) are trying to recover some losses that occurred during prolonged lockdown condition. Oil prices may also see a surge due to a rise in demand for private transportation as people try to avoid public vehicles because of fear psychosis of contamination.
Crude oil is already a widely traded commodity in the Indian exchanges. But, petroleum and diesel, the two main refinery items from crude oil, will trade in the commodity market for the first time. Futures trading in petrol and diesel will give refiners and bulk consumers another instrument to hedge risk. Welcoming the decision an oil sector analyst commented,
“It is a good development as it will allow industrial and bulk consumers of the two petroleum products to hedge their risks.”
However, he also expressed doubts regarding the timeliness of the decision. He mentioned that when the oil price is already low or falling, hedging could add to the cost of the buyers, which might deter them and dampen their interest.
The Overall Implication
Petrol and diesel are two of the most widely consumed fossil fuel products. Earlier also there was a demand to introduce petrol futures, but it got shelved. Commenting on it, PHDCCI President D K Aggarwal said, “This is a sensitive issue. I do not know whether SEBI or the ministry will be comfortable.”
Petrol and diesel prices in the local market are mostly affected by taxes which comprise 70 percent of its market price. Since these two refined oil products primarily impact industries and overall economy, the introduction of hedging instruments will work as a positive catalyst when the Indian economy is trying to bounce back.
However, the oil price for retail consumers will likely to remain unaffected. The consumption levels of retail consumers are low, and SEBI has set the floor level at 100 litres of petrol and diesel.
The decision to introduce futures contracts for petrol and diesel is timely. The government is currently under the process of remodelling the commodity exchange market, and we may see more products to get listed for the derivatives market. There are ninety-one more products in the pipeline. If introduced, petrol and diesel futures will undoubtedly be a big move.