Trade bets on higher crude prices

With crude prices hitting a new high every day, the crude oil futures contract on the Multi-Commodity Exchange (MCX) have clocked roaring volumes over the past 10 days.

On August 11, MCX recorded a peak turnover of Rs 4316.26 crore, of which crude oil accounted for Rs 2540.49 crore.

The September contract of crude oil futures on the MCX saw a rise of 68.81 per cent from last Friday in its open interest, indicating the bullishness of investors on the commodity. The open interest moved from 13,66,200 kg on August 5 to 23,06,400 kg on August 11.

"There is a good arbitrage opportunity between the MCX crude oil contract and the NYMEX crude oil contract, which is currently yielding a monthly return of 4 per cent," said Suresh Nair, vice-president, Kotak Commodity Services. There is usually a 99.9 per cent correlation between Indian and international crude contracts.

"The Indian market is following the Japanese model with a widespread retail participation," said another analyst.

The price jump at the Indian commodity exchange has been in tandem with the rise in international crude prices on the New York Mercantile Exchange (NYMEX) contract.

The price moved from Rs 2687.00 per barrel to Rs 2819.00 in the same period with traded volumes more than tripling 2,03,500 kg to 12,27,800 kg.

Anjani Sinha, director, MCX, said major oil and petroleum producers used the international market as a benchmark for physical prices. The high correlation in the prices of the futures market, the physical market and the international market, has brought in the volumes and liquidity on MCX as well.

Investors are looking at the crude oil contracts that were launched in March in the Indian market to book profits rather than as a long-term investment.

Krishna Nathani, head of research at Indiabullion.com, said, "The market is already overheated and is due for correction soon. Therefore investors should enter the market only to make short-term profits." The current bullishness of crude oil prices are largely speculative due to a depressed dollar and the political uncertainty caused by Iran's nuclear programme announcements.