IOC seeks MCX aid to hedge petro products

Indian Oil Corporation (IOC), the country's largest refiner and marketer, has asked the Multi Commodity Exchange (MCX) to provide a platform for hedging petroleum products like petrol, diesel and naphtha.

Currently, only crude oil can be hedged on the exchange. "Such a move would help us better our refining margins," said a senior official of IOC.

When an organisation hedges its portfolio, it operates within a pre-defined band of possible loss or gain. On the one hand, where this feature could help the player achieve certainty of the future cash flows, it could also eliminate the possibility of gaining from any favourable market movements.

MCX has already approached the Forward Markets Commission (FMC) for permission to offer hedging on oil products in addition to crude oil. In view of the volatility in global oil prices, the Reserve Bank of India (RBI) in November 2007 allowed domestic oil refining and marketing companies to hedge their commodity price risk to the extent of 50 per cent of their inventory using OTC or exchange-traded derivatives overseas.

But these companies have been playing safe so far.

IOC till date has hedged anywhere between 5-10 million barrels of crude oil during 2007-08. Its imports are 260 million barrels and it hedges less than 5 per cent of the same.

Says S V Narasimhan, director, finance, IOC, "The market has been very unstable in the past few months and thus we are not very aggressive on hedging."

BPCL, which hedges crude oil to bring stability to its refining margins, says its performance has been better than its targets so far.

"But we are going slow on this as it is a fairly new territory for us and we are still on the learning curve," says S K Joshi, director, finance, BPCL.

In the first year of hedging, it gained about Rs 50 crore and expects to increase the amount this year. "Our current hedging activity is very less. Since we do not have the freedom to charge our own market price for petro products and it changes in the international market, hedging becomes difficult," said another BPCL official.