Oil importers' rush to cover payments lifts premiums

Rush by oil importers to cover future payments for purchasing crude oil led to a flare-up in forward premiums.

The oil companies wanted to avoid exchange rate loss arising from spiralling oil prices.

Spot Brent crude went up to $ 45.21 per barrel as against 43.45 on Thursday, while the one-month future crude price at Nymex (New York Metal Exchange) shot up to $48.04 per barrel as against $46.37 on Wednesday.

"Even if the oil companies buy crude at spot price, they could save on the exchange rate by booking the dollars in the forward market," said a foreign exchange dealer.

The six-month forward dollar premium has risen from 1.87 per cent to 2.08 per cent, while the premium on the one-month dollar spiked to 2.95 per cent from 2.44 per cent.

Meanwhile, the government securities market failed to rally despite the inflation rate for the week ended January 1 being soft at 5.78 per cent.

A gilt trader explains this: "If the oil prices could move up so sharply in a day, the uncertainly would reflect negatively in the interest rate outlook. Therefore, it is difficult to project the rates and buy bonds."

Moreover, he said, the fact that inflation will soften was built into the prices "" there was huge year on year base effect. Therefore, when inflation fell, prices of government securities tripped too. The yield on the ten year benchmark 7.38 per cent 2015 gilt closed at 6.64 per cent as against 6.55 per cent on Thursday.

There was no buying demand in the market whereas traders who had bought gilts heavily this week were waiting for quotes to offload their holdings at a higher price, said a dealer.

In the absence of favourable quotes, traders started selling even at a loss and this led to bearish sentiment in the market, he added.