The Hindu Business Line : IndianOil may take up crude hedging

New Delhi, Dec 4 The continued volatility in the global crude prices may prompt state-owned refiners such as Indian Oil Corporation Ltd (IOC) to consider crude hedging. Currently, IOC hedges on refinery margins.

Global prices of crude oil and petroleum products since 2004 have remained high and volatile. The Indian basket had touched an all-time high for the current fiscal on November 26 at $92.13 a barrel. In fact, the basket saw a jump of $10 a barrel between October and November. In October, it averaged at $79 a barrel, while in November it averaged $89 per barrel. The July-September average of Indian basket stood at $72 a barrel.

However, the Government has been taking measures to insulate the consumer from the impact of high crude prices, which has led to rising under-recoveries on the part of oil marketing companies.

In 2006-07, about 79 per cent (111.5 million tonnes) of the crude oil processed by the refiners was imported. Speaking to Business Line, Director Finance, IOC, Mr S.V. Narasimhan, said, “Hedging in crude and oil products is not a profit-making activity, but is mainly an extension of the risk management measures. In the light of volatility in international prices, which is not translated into domestic prices, we may have to take a relook at our current mechanism. We need to deliberate upon what should be our position, whether we can also hedge on crude as supply is dependent on crude movement.”

“Since IOC is an integrated oil company, till now we have been hedging on refinery margins and the need for inventory hedging emerged last year – when the prices crashed suddenly. If the drop in prices is sudden carrying high cost of crude has negative impact. Similarly, over the last six-seven months the refining margins have gone up so we have to see if it is viable to lock our margins in such a scenario,” he added.

The company’s gross refinery margin (GRM) for the first half of the current fiscal has been around $8.44 per barrel. The refinery margins are revenue earned from processing crude. He said, the movement of crude prices also leads to basic product prices like gasoline moving up, but the retail selling prices of the products have not changed in the same proportion.

“This leads to under-recoveries going up,” he said.

Talking about inventory hedging, he said, it is to protect holding stock against heavy fall in crude prices.

The latest RBI notification allows refiners to hedge 50 per cent of their crude and product inventory to reduce any possible stock loss. IOC now hedges up to 5 per cent of its margins and is planning to increase the exposure to up to 10 per cent by next year, however, this is subject to stabilisation of crude and product prices.

IOC maintains a 10-15 day inventory of 9-10 million tonnes.

More Stories on : Petroleum | Derivatives Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page