Pratim Ranjan Bose

End of winter, refineries' shutdown in US, Europe the key

Kolkata , March 19

But for speculative demand arising out of the US - Iran face off and terrorist attack in Nigeria - crude futures will be range-bound with a bearish undertone in the near and medium term.

The bearish trend comes from the end of winter demand and the planned shutdown of refineries in the US and Europe between January and March. This will be followed by shutdown of refineries in a large part of Asia including West Asia and India between April and May. The week demand conditions may persist till June.

On the supply side, the recent spate of attacks on oil installations and kidnap of Royal Dutch Shell personnel in Nigeria has resulted in supply cut of Brent.

Evenly poised

Overall, the physical demand-supply situation is evenly poised.

However, the oil market is closely watching developments on Iran issue and any stringent measure by the US may trigger a rally. The emerging conditions makes it difficult for investors to take a longer term view especially in Indian context where forward contracts at both MCX and NCDEX are practically not delivery backed and volume is largely driven by non-commercial investors or speculators.

Markets' complexities

MCX WTI crude futures, records the highest volume in India. This is irrespective of the fact that WTI crude is of little relevance to us.

Speaking from usage end, Brent crude has maximum relevance in Indian. Strangely, however, MCX's Brent futures hardly have any liquidity and investors prefer Brent futures of NCDEX benchmarked to International Petroleum Exchange (IPE) futures. The latter on the other hand is linked to a number of derivatives and intermediaries like exchange of physical (EFP), which are not available here.

On top of everything, both the MCX and NCDEX futures are rupee-denominated which enhances the basis risk vis-à-vis the forex movement. The futures market maintains a lopsided commercial and non-commercial investment ratio leading to a strong bias towards short-term contracts. The underlying conditions led to sharp fluctuation in liquidity in the past.

According to oil companies, lack of relevance and volume is acting as a major deterrent for their entry in future trading in India, in the foreseeable future.

Increasing maturity

Shortcomings notwithstanding, Indian crude oil futures market is fast maturing. Commodity brokers managing portfolios are unanimous that middle and small sized corporates using crude oil or oil products or products having strong price correlation with crude oil, as inputs, are participating on MCX and NCDEX for hedging input cost risks.

A number of large corporates are also using future platforms for investment purposes. Corporate hedging an investments are adding stability to domestic futures market.

"Crude futures is now headed for a substantial growth in liquidity in next one year," feels Mr. Ajay Agarwal, Chief Dealer of East India Commodities Pvt Ltd.

The growth will sky-rocket if the regulators allow mutual funds investments in line with the global trend, says Mr Naveen Mathur, Head-commodities, Religare Comdex Ltd.

Future projections

While Mr. Agarwal is betting high on geo-political issues and the resulting future short supply leading to a probable spiralling of Nymex prices upto $100 by next winter, Mr Mathur and Mr. Anuj Gaur, Commodity Analyst of R R Commodities think that prices will fluctuate in a range of $3-4 in near and middle future.

Mr Mathur sets $57 as the support price at Nymex and sets the range at $62 to 65 for near and middle future. If the prices of MCX April contract break Rs 2,820 level, it will register a strong uptrend, he says. April contract was quoted at Rs 2822 on Saturday.

Overall prices are expected to rule above $60 per barrel.

Right strategy

Since asset value is much higher than the investments, risk basis is very high for small investors to enter the crude futures.

In line with the oil business, deep pocket investors may find it very exiting. However, investors should not keep their contracts open. Keeping in mind the prevailing uncertainties return expectations should be limit bound. The best strategy is monetising investments once the limit is hit and making a re-entry.

Risk hedgers may go long on Brent in the prevailing conditions.

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