The third largest Commodity Exchange, ICEX has urged the Securities and Exchange Board of India (SEBI) to allow futures trading in petrol and diesel. SEBI is now in its final stages of allowing futures for the said two commodities. With this, over 60,000 retail petrol pumps and thousands of small and big transporters, diesel consuming industries and bulk users will be able to hedge the petrol and diesel price risk.
In India, unlike crude oil, the prices of these two commodities that are derived from fossil fuel are fixed once a day by oil marketing companies based on the market trend. Till date, crude oil has been a proxy hedging product for diesel and petrol. It cannot be considered as an accurate risk management tool.
Indian Commodity Exchange (ICEX) CEO and MD, Sanjit Prasad, mentioned that there is a paucity of serious hedgers participating from across the country due to basis risk in the commodity and derivatives market. He further added that ICEX proposed a contract for petrol and diesel to eliminate the basis risk for hedgers or participants in the country.
As these commodities are not allowed to be stored by users, the proposed petrol and diesel contracts are cash settled. Majority of contract and other fleet operators have tie-ups with petrol pumps for the supply of diesel. Quite often the price is also part of the contract. When the average price during the contract period is higher than the contracted price, the pump owner runs into loss as he has no instrument to hedge the price risk.
As mentioned in the Business Standard report, the benchmark price for futures trading will be based on the daily price announcement by the oil marketing company that the exchange ties up with. However, the oil marketing companies fix the price of gasoline and diesel based on their international prices. The pump owners who pay advances to get supplies, the petrol and diesel futures will act as a perfect hedge for them.[The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views and/or the official policy of the website. ]