Oil marketing companies will be able to hedge their refinery margins (difference in crude oil and finished product prices) and end-products from crude oil.
After getting the go-ahead from the Forward Markets Commission (FMC), the regulatory authority for forwards and futures markets in India, Multi-Commodity Exchange (MCX) has launched heating oil futures. This will open a window of opportunity for oil companies to hedge refinery margins and end products on MCX. So far, MCX had been providing a platform to oil exploration and marketing companies only to hedge volumes for crude oil.
MCX launched hedging of heating oil or furnace oil yesterday. The comex will launch a platform for hedging of gasoline in a few days.
Heating oil is one of the products refined from crude oil. If oil marketing companies can sell heating oil in the futures market, this will automatically cover their refining cost margin. Quite a few refineries wanted to trade in heating oil and wanted to fix their refinery margin instead of using crude as an indirect commodity to hedge.
| * Indian refiners and oil marketing companies have been hedging their refinery margins on the Singapore Exchange so far |
| * Indian Oil Corporation, the country's largest refiner had last year sought the regulator’s permission to allow the company to hedge its refinery margins and end-products such as petrol and diesel. |
| * Hedging refinery margins allows oil companies to protect their interests in times of volatility |
Industry experts said companies including the Indian Oil Corporation, Bharat Petroleum Corporation, Hindustan Petroleum Corporation, Reliance Industries, Chennai Petroleum Corporation (CPCL) and Mangalore Refinery and Petrochemicals (MRPL), a subsidiary of Oil and Natural Gas Corporation (ONGC), will be able to hedge and ensure protection of their refinery margins.
Indian refiners and oil marketing companies have been hedging their refinery margins on the Singapore Exchange so far. State-run Indian Oil Corporation (IOC), the country’s largest refiner, had last year, sought FMC’s permission to allow the company to hedge its refinery margins and end products such as petrol and diesel.
“The purpose of hedging refinery margins is that you are assured of a particular level. As a refining company, we are more concerned about the refinery margins and our interest is to protect the same,” said a senior IOC official. An exploration and production company is exposed to the price risk for the entire duration of its business cycle (usually a year), thus exposing it to higher oil price risk with potential to impact the bottom line as well as the top line.
On the other hand, the oil refining and marketing companies are exposed to these risks only for the length of the input purchase to the product sale period, which ranges from a few days to a couple of months.
“We have a risk management policy in place and so far we have substantially gained from hedging our refinery margin overseas,” said a BPCL official. BPCL trades around 20-25 per cent of its hedgeable products on over-the-counter (OTC) market overseas.
