National Commodity and Derivatives Exchange Limited (NCDEX), India’s premium commodity exchange, today announced the launch of Furnace Oil Futures Contract.
The Furnace Oil Contract enables the Indian corporate who use Furnace Oil as a source of generating energy from alternative sources for running their plants, to hedge the rising input costs. The Furnace oil contract on NCDEX platform was inaugurated by the Chairman and Managing Director of Bharat Petroleum Corporation Ltd - Mr. Ashok Sinha, who flagged off the first trade.
NCDEX Managing Director and Chief Executive Mr. P H Ravikumar added “The launch of Furnace oil in association with BPCL is indeed a significant step in aligning the Indian energy markets with Global ones. The association and participation of BPCL (one the Navaratnas among PSUs) shall reinforce the industry in using the contract to contain their costs through participation in Furnace oil contracts on NCDEX platforms. NCDEX is committed to bring the international market linkages to the domestic participants through structuring of contracts relevant to the local conditions. The NCDEX Furnace oil futures contract offers an extremely useful and effective hedging tool for Energy producers with energy related price risks.”
NCDEX has worked closely with Bharat Petroleum Corporation Ltd in developing the delivery mechanisms for this contract thus making it oriented towards the industry needs. An agreement to this effect has been signed between NCDEX and BPCL, which will enable the participants to effect smooth deliveries for their open positions as all the open positions in the contract on the contract expiry date are compulsorily deliverable. NCDEX and BPCL shall work towards evolving the contract as a benchmark in Indian markets for pricing this product by the Indian refiners. Such a benchmark will result in increased participation while also making this contract among the most liquid in the energy basket on the Exchange.
NCDEX has also signed with other key importers and tank age owners for delivery of the product. The robust delivery mechanism shall ensure that participants could use the platform for procuring furnace oil as well. The contracts are very relevant for the oil PSUs as now they will have the means to hedge their ‘fuel oil cracks’ which are the difference between the crude and product prices. A large number of industrial companies have evinced interest in the contract as they are keen to lock in their future furnace oil price exposure. The contract would also interest the short term traders and price view taker as the volatility of the commodity is high up to an annualized volatility of 45 %. Typically the risk transfer happens between the hedgers who have a physical exposure to the commodity and the traders who have a high risk appetite and take price views.
Furnace Oil finds large application in industries for power generation and its price volatility affects the bottom lines of many manufacturers. In India Furnace Oil (globally termed as Fuel Oil) is the third largest cut of the crude barrel after High Speed Diesel (HSD) and Superior Kerosene Oil (SKO). But unlike HSD and SKO, its prices are not administered by the Government. The product is freely importable and exportable. Nevertheless, most of furnace oil is produced and consumed domestically and Indian consumers have had no avenues to hedge their consumption costs. Furnace Oil prices have been very volatile and have affected energy costs of many manufacturers.
NCDEX’s rationale for the introduction of the Furnace Oil contract:
- India has a large consumption of Furnace Oil and other heavy ends such as LSHS and RFO. It forms nearly 18% of the total petroleum produce.
- The value chain for Furnace Oil market is very long commencing from the importers oil companies to the final consumer and all participants in the value chain face the price risk. A futures contract would enable the participants to effectively hedge their price risk.
- Indian Corporate has no means of hedging their Fuel price risk as most of the consumption is domestic. Hedging the price risk on international markets is cumbersome and costly;
- Furnace Oil is a commodity that is well integrated with the global market. Global supply and demand factors have an influence on the domestic Furnace Oil prices.
- Furnace Oil is the single largest tradable petroleum product outside the Government price control. The oil companies and importers are free to price the product. At present the oil companies price this product on the basis of import parity.
- It is freely importable and exportable. In fact both imports and exports of Furnace Oil are taking place suggesting an absence of any efficient price discovery mechanism for both producers and consumers.
- The price of other heavy distillates such as LSHS and RFO are directly linked to prices of Furnace Oil.
Exchange traded contracts in Fuel Oil are traded actively in the Shanghai Futures Exchange and OTC contracts are also very popular with Singapore being the hub.
Internationally Furnace Oil is known as Fuel Oil and is traded in many varieties based on its specifications of viscosity and sulphur percentage. World Furnace Oil production (residue/distillate) in 2004/05 is forecasted at around 2500 Million Metric Tons.
The Indian Scenario
Prices of Furnace Oil were under the ambit of Administered Price mechanism (APM) till 1998 after which the Oil companies were given the permission to price Furnace Oil. As a result a lot of private importers have begun to source Furnace Oil from international markets.
Key Indicators
- Price assessments given by Platts/ Argus on daily basis.
- Crude Oil prices
- Imports of Fuel oil into China
- Global Freight Rates
- Refinery shutdowns in India
- All industries who have energy price risk
- Traders/resellers in the petroleum business
- Importers/ Exporters of petroleum products
