Futures trading in petrol, diesel may get Sebi nod

Petrol and diesel futures will be priced in Indian rupees and the benchmark price will also be Indian

The Securities and Exchange Board of India (Sebi) is considering allowing futures trading in petrol and diesel, according to sources. The petroleum and natural gas ministry has already approved the proposal.

Petrol and diesel are among the 90-plus commodities that have been approved by the government for derivatives trading.

Globally, petrol and diesel derivatives are traded on the Nymex and ICE exchanges.

The proposal for trading in petrol and diesel derivatives was submitted by the Indian Commodity Exchange (ICEX) eight months ago. Sebi deliberated on the matter and sought the opinion of the oil ministry on the issue, according to sources.

The ministry also held talks with respective players and oil marketing companies and later approved the proposal.

Now, the market regulator is deliberating with the exchange on details such as the settlement price for contracts and the mode of delivery or cash settlement.

Crude oil is traded on the Multi Commodity Exchange (MCX) but settled by cash.

This means that on the day of expiry, there is no delivery of the commodity.

Even the benchmark for crude oil traded on the MCX is WTI crude, while most of India’s imports are of the Brent variety.

MCX crude oil contract is very liquid and hence hedging happens. However, to expand the basket further for participants and hedgers, MCX has also applied to Sebi to launch futures trading in petrol and diesel.

The petroleum ministry is understood to have asked Sebi for a product where smaller investors and transporters can hedge, since prices of both automobile fuels are rising consistently and consumers have no direct commodity where they can hedge the risk.

ICEX managing director and chief executive officer Sanjit Prasad confirmed that the exchange has approached the regulator with a proposal to allow futures trading in petrol and diesel, and added, “We are awaiting Sebi approval.”

Petrol and diesel futures will be priced in Indian rupees and the benchmark price will also be Indian.

However, prices of petrol and diesel are different across cities and public sector oil marketing companies such as Indian Oil, Bharat Petroleum and Hindustan Petroleum change them on a daily basis.

Private sector companies, including Reliance Industries and Essar Oil, also retail fuel. Hence there is no single national benchmark price.

However, futures contracts will need a price for daily and contract settlement.

Sebi and the ICEX are deliberating on what should be considered the benchmark price for settlement.

Another issue that genuine hedgers would be interested in is physical delivery of both fuels.

However, the requirement for petrol and diesel will be regular and storage will be difficult for consumers.

The exchange has proposed to the regulator that oil marketing companies’ depot or petrol pumps deliver the product.

Sebi is yet to take a final call on this, according to the source quoted above.

ICEX expects the contracts to be attractive to both individual and corporate consumers along with transporters, and if delivery from depots is allowed by Sebi on a contracted price, a delivery mechanism can be worked out.

The contracts will be equally good for large consumers such as huge transport companies.

Photograph: Rupak De Chowdhuri/Reuters