[SmartCat]

Oil ministry gives nod to petrol, diesel futures
http://economictimes.indiatimes.com/...w/64353237.cms

What this means is you can 'invest' in petrol or diesel with an app or trading software and make money if petrol or diesel prices go up. Obviously, you lose money if fuel prices fall - but you pay less at the fuel pump. The main idea behind futures is to hedge against rising prices of petrol and diesel.



How it works:

1) There will be minimum litres you can buy (a large number, probably 1,000 or 2,000 litres). So this will be useful only for passenger/cargo fleet owners. Or owners of Innova Crysta Petrol AT

2) Assuming 1,000 litres is the minimum, the deal value at Rs. 80 for petrol works out to be Rs. 80,000

3) When you make a "buy petrol" trade for 1,000 litres, You need to keep 10% of the above amount with the broker as margin (Rs. 8,000)

4) If petrol prices go up 5% in a month, your account gets credited with Rs. 4,000. If petrol prices go down 5% in a month, Rs. 4,000 is deducted from your account.

Note: I'm oversimplifying certain things for clarity and ease of understanding.

[jetsetgo08]

Wow! Now the govt. wants us to invest on black gold. They have found a really clever way to appease the people even if the fuel prices head northward.

[blackwasp]

Originally Posted by smartcat

Note: I'm oversimplifying certain things for clarity and ease of understanding.

Can these be directly redeemable at the pumps? Eg. In case of fall in the prices, can I will simply redeem them against petrol for my Abarth (FYI gas guzzler in the city)? And knowing my luck, the moment I buy these, it will result in an immediate fall in the fuel prices. So, fall or rise, it's a win for me any which ways.

[nitinhegde]

Originally Posted by blackwasp

Can these be directly redeemable at the pumps? Eg. In case of fall in the prices, can I will simply redeem them against petrol for my Abarth (FYI gas guzzler in the city)? And knowing my luck, the moment I buy these, it will result in an immediate fall in the fuel prices. So, fall or rise, it's a win for me any which ways.

LOL. It will be just like stock futures. Please read "Derivatives/Futures" trading to get more insights on the same.

[SmartCat]

Right. Futures contracts are somewhat complicated, and hence petrol / diesel contract is likely to be used only by businesses that are significantly affected by movement of fuel prices. Here, when you enter into buy "1000 litres petrol" contract, there is always another person who is selling that contract to you. You are NOT buying it directly from Govt of India or HPCL/BPCL/Indian Oil. If you have gained Rs. 4,000, there is somebody else who has lost that Rs. 4,000. If you have lost Rs. 4,000 because fuel prices fell, the seller of contract gets that Rs. 4,000 you lost.

But why would somebody sell a futures contract (and lose money) when we all know that fuel prices will go up over long term, atleast at inflation rate? Because such businesses lose money when fuel prices fall (even if the fall is temporary). And they would like to hedge against it.

Examples:

1) Oil refineries like MRPL, Reliance
2) Oil marketing companies like HPCL/BPCL/IOCL
3) Petrol pump owners (they lose money on inventory when fuel prices drop).
4) Government of India (since fuel tax is a particular percentage of price)

Other sellers (of contracts) will include speculators who predict a fall in prices. After all, price rise will not be in a straight line.

[anjan_c2007]

It is in all likelihood in the e-format and since it is legalised, any recognised share depository should be able to include it (?) along with the list of shares/ MF's /debentures held in his or her or its account by individual/s or any legally recognised entity like a firm, trust, company or body corporate and so on.

The regulator SEBI has also been roped in and its not crude oil futures here as is the international practice, but petrol and diesel futures as stated in the press report. And it would be traded in the Indian Commodity Exchange (ICEX) market ( which trades in commodity futures) and not in the Bombay Stock Exchange or the National Stock Exchange.

And the buyer can turn seller and vice-versa as and when he/she/it feels like trading in the commodity.

[dark.knight]

Originally Posted by jetsetgo08

Wow! Now the govt. wants us to invest on black gold. They have found a really clever way to appease the people even if the fuel prices head northward.

Appease certain sections of society is more like it, not everyone will have the finances/know-how/or interest in doing so, in my case it is interest. I'd say any move that doesn't involve the public at large is a poor move made purely to show that homework is being done. The stock-market gambling was bad enough but I've come to accept it as businesses won't exist without it, but on essential commodities like petroleum I find it silly if not just laughable.

The key-word here is hedging, it won't turn profits unless you're dealing with big quantities and also have many people effectively 'gambling' in the same futures. You've to look at it in a way that you hedge running losses if petrol/diesel prices go up (basically dependent in your usage, again) and you hedge gambling losses if petrol/diesel prices go down. Either way you're looking at marginal gains or losses, not worth it.

Looking into NYMEX and TOCOM, I'd say the minimum quantities will be much more, say atleast 5000-10,000 litres, that means you're effectively investing Rs.4,00,000/- to Rs.8,00,000/- on hedging fuel running costs and over the long run, trust me you're barely running even and that's about it.. all in an era where electric cars are going to be sold by the thousands in the near future (10 years). This is the same global market that shunned and sought for bans on bitcoins even though it was a financial revolution by the people, for the people, for obvious reasons LOL.

Not worth it in my view.

[Vitalstatistiks]

Originally Posted by smartcat

But why would somebody sell a futures contract (and lose money) when we all know that fuel prices will go up over long term, atleast at inflation rate? Because such businesses lose money when fuel prices fall (even if the fall is temporary). And they would like to hedge against it.

Also, the derivatives contracts in India are required to be squared off on last Thursday of every month, right? So whatever be a person's position on that day will need to be settled and fresh trade entered into.

[Abbas]

This is what i think is going to happen:

Current prices of fuel is on a all time high even though crude prices are falling. These prices are deliberately being kept high because its their "Ace in the Pack" (of the Current Govt).

There are already reports in the section of (controlled) media that Prices might come under GST. So it wont come as a surprise that just before 2019 election, fuel prices are dropped to all time low and the current govt uses this to score brownie points to appease the voters.

That's the "Ace in the Pack" if things go south for them in 2019. Ironically, these media reports of fuel coming under GST ambit have surfaces after Karnataka polls. Its anybody`s guess that this is an insurance policy.

Coming to fuel as stock trading, the AAM AADMI will invest and when the prices drop, it will make up for the loss for the oil companies incurred due to migration to GST.

[Carpainter]

This idea of GOI may be tempting for big business houses and people who are ready to and/or able to deal in commodity market but this is no Achhe Din for the masses. I'm sure 80% of the people who use fuel on a regular basis have no idea about commodity trading. Think about all the cab/bus owners who earn their bread and butter using fossil fuel and with this move things will only get complicated for most people.


A much better idea would be to give up some excise duty previously hiked by the govt. taking advantage of low crude oil price in the international market. But they are too reluctant to let go of the golden goose. Instead they are creating complicated ideas to prove their efficiency. It feels like light-years ago when fuel price was a political issue in India and every single penny hike in price was a cautious approach. Such things happen when a govt. wins elections almost uncontested state after state and people show way more faith in the system, more than it deserves.

[gunsho]

Originally Posted by Vitalstatistiks

Also, the derivatives contracts in India are required to be squared off on last Thursday of every month, right? So whatever be a person's position on that day will need to be settled and fresh trade entered into.

One have the choice to rollover to next month series when current contract is expiring or even before that. As many said, most of the commodities trading are to hedge and protect the big players from volatile price fluctuations.

[giri1.8]

So, the whole world wants to move away from fossil fuel, and we are expected to invest in it ?

Imagine investing in 1000 litres, and one starts to wish for price hike .One has to shell out more at the fuel station even in case of rise, so looks like a lose-lose situation for the consumers.

[avisidhu]

Originally Posted by smartcat

....

But why would somebody sell a futures contract (and lose money) when we all know that fuel prices will go up over long term, atleast at inflation rate? Because such businesses lose money when fuel prices fall (even if the fall is temporary). And they would like to hedge against it.
....

Wouldn't disagree with the fact the oil prices would rise with time, but the relation with inflation seems to be tenuous at best. The way oil prices have behaved in the last decade odd, seemed more to do with global geo-politics and supply-demand constraints, than mere inflationary pressures.

If someone can throw more light on this aspect, that would be very helpful!

[SmartCat]

Originally Posted by avisidhu

Wouldn't disagree with the fact the oil prices would rise with time, but the relation with inflation seems to be tenuous at best. The way oil prices have behaved in the last decade odd, seemed more to do with global geo-politics and supply-demand constraints, than mere inflationary pressures. If someone can throw more light on this aspect, that would be very helpful!

Over a very long period of time, rate of increase in commodity prices (cement, coal, metals, petrol & diesel, food grains, cooking oils, cotton etc) will be equal to India's long term inflation rate. Each of the above commodities will have different weightages in calculation of inflation rate though.

Supply demand issues will always be there, but they are self-correcting over longer term. That is, if there is crude oil shortage, prices shoot up rapidly. Suddenly, deep sea oil drilling & shale oil will become profitable. This results in higher crude oil production because oil drillers will produce more (make hay while the sun is shining adage fits here). Conversely, if there is an oil surplus, crude oil production will drop because lots of oil sources will become unprofitable.

Ditto with all other commodities.

[NiInJa]

Originally Posted by Carpainter

This idea of GOI may be tempting for big business houses and people who are ready to and/or able to deal in commodity market but this is no Achhe Din for the masses. I'm sure 80% of the people who use fuel on a regular basis have no idea about commodity trading.

A much better idea would be to give up some excise duty previously hiked by the govt. taking advantage of low crude oil price in the international market. But they are too reluctant to let go of the golden goose.

While I agree that excise duty should be cut as a short term measure and its high time govt. does it now, this decision of having futures on fuel might actually work in the long term. Its also good to see that this government doing something creative/innovative to find a long term solution rather than only sticking to a populist sentiment (which is also needed by the way). Honestly, I was one of those 80% who didnt know commodity trading until yesterday. Thanks to the govt, I know what that is now.

We have to also consider some grim realities of fiscal deficit and current account deficit. Only about 2% on the total population pays income tax (read: Salaried class). The government is trying to bring small businesses (which make enough money) under the tax fold but I am not sure how much time it is going to take, or if that will ever happen. Until the government finds a better way to get more money from other sources, our fiscal deficit is always going to be a problem. If they plan to tax more on people's income instead and lower excise duty, it is the only the 2% which is going to feel the pinch while those who don't pay taxes enjoy lower fuel rates.

Till such time, the only way government can get some money for development and other spending is by taxing fuel, because it is one commodity which is directly related to one's spending power (even if he evades tax). A poor man won't buy a gas guzzling motorcycle, nor will a rich man buy an Alto, but they will still get their work done.

While a part of me would be happy to see the government reduce excise duty and take the burden on themselves by reducing spending, there is another part of me which wants India's infrastructure (rails, roads, healthcare) and agriculture 'industry' to improve for which the government needs to spend money. We are sure living in some interesting times