Petrol, diesel futures trading to start soon on exchanges

Sources said that petroleum ministry has approved the plan to allow trading of petroleum products in the derivative market and the commodity exchanges would be able to launch petrol and diesel futures soon after SEBI releases its final regulations in this regard.

Futures are financial contracts which help the buyer to purchase a commodity, or the seller to sell the commodity, at a predetermined future date and at a predetermined price. In the case of petrol and diesel, the derivative product would involve buying a specified quantity of the at a specified price with delivery set at a specified time in the future. In a rising market where prices of fuel is going up, the futures product would protect the participant from losing out as the financial product would hedge the risk and ensure uniform pricing of the commodity.

"It is a good development as it will allow industrial and bulk consumers of the two petroleum products to hedge their risks. But in current market conditions, in the absence of a big pick up in demand oil prices are either stable or falling, hedging would work against the interest of participant as it would add up to the cost of hedging," said an oil sector analyst asking not to be named.

Currently futures trading is allowed in crude oil giving opportunity to refiners to hedge their risks against frequent price fluctuations. The addition of petrol and diesel with give them another instrument to hedge their refining margins.

Sources said that as current market conditions may not be conductive for a futures market in petroleum products, it may wait before intruding the new product in the market.

Petrol and diesel futures in any case will not benefit retail customers as the quantum of fuel used by them would be low. SEBI may allow derivative products with a floor of say 100 litre of petrol and diesel. This will be too high a level for retail customers to participate in the futures market.

Futures contract in petrol and diesel are expected to be ideal for refiners, transport companies, petrol pump owners, etc. who are exposed to daily price fluctuations in the petroleum products. Railways, aviation, fleet owners and industrial consumers could also take benefit from the product.

In India a part from volatility in international markets, petrol and fiscal prices are also impacted by frequent changes in government duties, both at central and state levels, on the two products. The futures contract can help against these unforeseen price increased too.