Oil firms can hedge freight risks

MID-TERM MONETARY POLICY 2008-09/ Policy & Business

Companies are likely to save 3-4 per cent of costs.

The Reserve Bank of India has allowed domestic oil and shipping companies to hedge their freight risk with overseas exchanges/over-the-counter markets. This will allow them to secure their freight costs, especially when the rates are volatile.

“It’s an instrument available to oil companies. Henceforth, we can hedge our freight risk and secure our freight costs, especially in a volatile market,” said the chief financial officer of a public sector oil major.

Oil companies pay a freight of $30-$40 per tonne on shipments, and experts feel hedging their freight risk can help them save 3-4 per cent of the freight cost. But there’s unlikely to be any takers for this as freight rates have fallen shaply.

Major oil refining and shipping companies have been representing to RBI for extending the hedging facilities further in view of the recent volatility in freight rates. Refining companies can hedge their commodity price risk to the extent of 50 per cent of their inventory using OTC/exchange-traded derivatives overseas.

Oil producers are exposed to the risk of any fluctuation in oil prices whereas; oil refiners and marketers are concerned about protecting their spreads between crude oil and refined products.

But Indian oil companies don’t hedge much. “These are extraordinarily volatile times and hedging is not an option we are considering at present,” said an official from an OMC.