MCX, NCDEX to launch energy futures contracts

Looking at an ever-increasing demand for crude oil, natural gas, furnace oil, and electricity, two national commodity exchanges ""The Multi-Commodity Exchange of India and the National Commodity and Derivatives Exchange "" are planning to launch futures contracts in the energy sector.

"We are awaiting approval from the regulator, Futures Market Commission (FMC) about the launch of futures contracts in natural gas and furnace oil," MCX deputy managing director Joesph Massey told Business Standard.

Other contracts like electricity and coal, though have been pushed on the backburner at present, may soon be sent by MCX to the FMC for approval, Massey said.

For natural gas, NCDEX has signed a memorandum of understanding with GAIL (India) Ltd. The exchange will initially start a spot market in natural gas and will later take it to the futures after seeing the response and subject to FMC's approval, the NCDEX official added.

Currently, Gail has a monopoly on the natural gas market this making proper price discovery rather difficult, a Mumbai-based energy sector analyst said. The analyst said the new initiatives is likely to helping in a proper price discovery for natural gas.

India's domestic natural gas demand, mostly from fertiliser and sponge iron units, exceeds supply. NCDEX has approached the FMC for approval to launch futures trading in crude and furnace oil, an exchange official said.

Currently, crude oil is the world's highest traded commodity derivative registering daily trade of over $11 billion on the New York Mercantile Exchange, the world's largest commodity bourse, better known as Nymex.

MCX's crude oil contracts in light sweet crude oil and brent crude are seeing a fair response. "With a daily turnover of over Rs 1,000 crore, crude futures is the top number two revenue earning contract for the bourse," Massey added.

Massey also dismissed that proposed regulation to make delivery compulsory may be difficult for the crude contract. He said delivery will not be a problem at all. But he agreed that it will be very rare that anyone seeks a delivery in any of the crude oil contract.

However, traders and analysts feel that it will be a while before the crude contracts will be used by the country's oil companies to hedge volatility in crude oil prices.

This is largely due to lack of depth in the domestic futures vis-a-vis India's crude oil demand. Further, India relies more on imports to meet its crude oil demand than domestic production.