That was a spot deal, but the futures market behaves much the same when mega corporations are on the prowl. A New York Mercantile Exchange (Nymex) treatise (`Trading through the times') describes the present day scenario thus: ``Once it had been Standard Oil that had set the prices. Then it had been the Texas Railroad Commission in the United States and the majors in the rest of the world. Then it was OPEC. Now price was being established, every day, instantaneously, on the open market, in the interaction of the floor traders on the Nymex...''

Think-tanks, assigned the task of recommending ``risk management techniques'' like futures and forwards for oil imports, are nowburning midnight lamps trying to figure out where Indian companies would fit, in a market controlled by giants. Oil companies at home, including market leader Indian Oil Corporation, are destined to be at the receiving end of oil price trends, riding waves of other companies' makings.

The futures market, in which Indian oil companies are now raring to take part in, is largely controlled by global giants like Chevron, Mobil, Shell, British Petroleum, Tomen, Caltex, Elf and Nissho Iwai, each of which are large enough to make a dent in the world market. India takes part in barely two per cent of the world trade in oil. The country purchases close to 55 million tonne of crude oil and petroleum products a year, in a world that trades in nearly 1900 million tonne of oil. Futures may come on a trial basis at first.

The furrowed brows in government suggest that futures trading in crude oil and petroleum products would not quite come with a bang, but rather with a whimper. Forward trading techniques in petroleumoils may at first be allowed to Indian companies only on a limited scale and possible for some select items, like crude oils perhaps.

A panel set up by the Union petroleum ministry to examine ``risk management'' strategies for oil imports, may also insist that oil companies venturing out into the untrodden tracks of futures and forwards, have experienced allies. Indianoil, may for instance, have to rope in an international partner for its oil futures business, despite its long years of experience in canalising the country's crude and petroleum products imports.

When the report on ``risk management'' strategies for oil imports is ready, the petroleum ministry plans to recommend a modification of the September 1998 notification of the Department of Economic Affairs (DEA). The notification had left out crude oils and petroleum products from the list of commodities in which hedging price risks was allowed. It said Indian corporates could hedge commodity price risks at international commodity exchanges,through authorised dealers. Two months after the notification was issued, the petroleum ministry decided to act on the recommendations of the Standing Committee of the Parliament on Petroleum and Chemicals. The Parliamentary panel had, in April 1997, called for changes in policies to enable canalising agency Indian Oil Corporation to hedge import price risks.

The committee on risk management strategies for oil imports, comprising top brass of Indianoil's international trade division and the petroleum ministry, have since consulted experts and industry.

The panel has also invited presentations from consultants and investment bankers familiar with trading in oil futures, like Arthur Andersen and Merrill Lynch. Shortly the small band of think-tanks drawn from government and industry is expected to study first-hand the operations at commodity exchanges at New York (Nymex), London (International Petroleum Exchange) and Brazil.

The Centre's proposal to amend the September 1998 notification on ``hedgingthrough international commodity exchanges'' to include crude oil and petroleum products, have been widely welcomed by oil refining companies at home, especially Indian Oil Corporation (IOC), Reliance Petroleum, the Mangalore Refinery and Petrochemicals Limited. Hindustan Petroleum Corporation and Bharat Petroleum Corporation are also in favour of hedging price risks in the hugely volatile crude oil market.

Crude imports worry all, since refineries will have to rely increasingly on imported crude in the years ahead, as refining capacities grow much faster than oil production. Already Reliance Petroleum has tied up with Shell Trading and Transport for importing the 27 million tonne of crude oil it is expected to require annually. Shell, incidentally, is an old hand at the oil futures game.

The private sector oil refineries (Reliance Petroleum and Essar Oil) and the joint sector refineries (like Mangalore Refinery and Petrochemicals) have the right to choose their own sources of crude oil from April lastyear. The MRPL, however, continues to canalise its crude imports through Indianoil for the moment.

Essar Oil is likely to import 10.5 million tonne of crude beginning next year and the joint sector Mangalore Refinery and Petrochemicals Limited (MRPL) needs nine million tonne of crude a year. Refineries will import close to 60 million tonne of crude oil this year, compared to 35 million tonne last year.

Every $0.5 a barrel hike means $200 million more for India. The demand for imported crude will increase as new refining capacities go on stream and the crude oil market is among the most volatile. North Sea Brent crude oil prices have fluctuated between $9.8 a barrel to $24.16 a barrel in the last three years. Prices of the Dubai crude (widely used in Indian refineries) have moved in the range of $10.14 a barrel and $21.78 a barrel.

Every $0.50 a barrel change in oil prices has meant a difference of nearly $200 million to the country's import bill (for 53 million tonne of crude and petroleum products)every year. Should the nearly $5 a barrel difference in crude prices between March and now persist till April next year, the country will pay out nearly $ 2 billion more in foreign exchange at the same rate of imports.

The risky price swings and the risks borne by Indianoil so far, prompted the Parliamentary Standing Committee to recommend policy changes to allow the canalising agency to indulge in hedging price risks. New entrants in the oil refining business want oil futures trading for the same reason.

The instruments available

The instruments available in the market are primarily forward contracts, futures contracts and over-the-counter markets, offering ``swaps'' and options. Forward contracts are contracts for future delivery for cargo purchased. The forward markets are unregulated and the contractual obligations are based on the deal between the buyer and the counter-party.

Futures contracts are similar to forward contracts, except that they are regulated by petroleum exchanges, likeNew York Mercantile Exchange (Nymex), the International Petroleum Exchange (IPE) in London and the Singapore International Monetary Exchange (SIMEX). Unlike in forward contracts, the cargo, its size, grade, quality and payment details are laid down by the exchanges.

The DEA notification of September 1998 only permits hedging price risks through such commodity exchanges. The oil industry experts panel is also looking into the other instruments available, like over-the-counter (OTC) markets. These markets are extremely versatile, since the instruments can be customised to suit the buyer's needs. The traditional over-the-counter tools are price caps or collars, swaps and options. Some segments of the oil industry feel that the OTC markets would suit Indian oil refining and marketing companies, since they import such a wide variety of crudes and petroleum products.

The cause for caution

The tremulous steps to hedging price risks in the hugely volatile petroleum market are understandable, since thefutures market remains a rather select club of expert hands. Very few of the oil-rich Gulf nations have, for instance, allowed their national oil companies to use the so-called ``risk management tools.'' So far, only the national oil companies of Saudi Arabia and Oman are known to be ``actively considering'' using instruments for hedging oil price risks in the future. Kuwait uses instruments only for currency risk management and is still mulling on tactics for oil price risk management. The National Iranian Oil Company also indulges in oil price risk management on a limited scale.