Crude a better option in futures

DERIVATIVES TRADING

Here's something for the uninitiated. Gold may be glittering, but its equally celebrated counterpart, crude oil, seems to be shimmering just as brightly despite its recent debut in the domestic commodity market.

While crude futures have been clocking volumes of over 200 per cent on its futures trading platform on the Multi Commodity Exchange since a month of its launch, it's not for the lily-livered.

Crude prices have once again hit the roof with the New York Mercantile Exchange (NYMEX) benchmark April crude touching a high of $55.20 per barrel.

With such high volatility, and being an essential commodity it is but natural that trading on the Indian platform was much demanded. Besides, according to market sources, if this resistance level is hit once again, and the price settles between $53 and 54 per barrel, then it won't be long before it crosses $60.

Not surprisingly, the contract is raking in Rs 50 crore on a daily basis already. If you're one to make the bet, the platform is welcome to traders, importers and common people alike. A few points to remember though, before you take the plunge.

Weather trends top the list of fundamental indicators. Biting cold winters ensure that demand for fuel is higher during the season - from November to March.

Seasonally prices are always higher by $5-$10 per barrel during these months, making it very attractive for investors.

Other than seasonality, production and supply is entirely controlled by the Oil and Petroleum Exporting Countries (OPEC), which make announcements every now and then that affect the prices. Sources also add that production in most countries are expected to peak by 2008, which implies that the price volatility is expected to remain prominently in the picture until then.

Market analysts point out that crude is also often considered a hedge against falling gold prices. While both generally move in tandem, when they divert owing to fundamentals most funds are known to hedge risks against gold through crude futures.

With this information, any member of the exchange can bet on the commodity paying the margin for trade of roughly Rs 10,000 per lot of the crude contract. (And need not take delivery!) This amounts to 5 per cent of the cost of 100 barrels of crude or one lot (taking the average price per barrel as Rs 2000) and can hold their position till they deem fit.

In fact, players, who have taken their positions since the beginning of the contract on February 9, 2005, would have made a profit of almost 17 per cent on their buys as domestic prices have gone up from Rs 2011 per barrel to Rs 2350, in the near month contract. So make those investments before you miss the bus.