The Crude Oil Hedge And then I spoke of how India should hedge some of its Crude Oil exposure <http://articles.economictimes.indiatimes.com/2014-10-13/news/54970889_1_deepak-shenoy-capital-mind-hedges>. At $80 or below, Brent Crude may be low enough for us to set up longer term hedges, if available. This should be the realm of oil refiners, but most of them do not hedge, and they are government owned etc. In a purely competitive market, they should have been hedging and reducing the cost of fuels if the hedge worked and so on, but this is not a proper market. In fact, they end up buying dollars directly from the RBI whenever RBI feels that their buying will distort the actual market.
This needs a broader approach because India imports a lot of crude. Just oil imports are more than 30% of India’s overall imports (last year: $160 billion out of the total imports of $480 bn). That means it should be of interest to reduce the overall impact of oil imports. However, the market may not really allow for long term hedges (what if the 2 year or 3 year futures are only available for a much higher price?), which means the question is moot. It could be that oil prices fall even further. Some analysis of the recent crude fall is that it is from oversupply, since US shale oil manufacturers have reduced demand from the US. The shale folks can stay competitive as long as oil is above $40 to $60 <http://www.smh.com.au/business/markets/oil-price-fall-wont-break-shale-industrys-back-20141020-118s2y.html>. Remember also that the oil glut of the 1980s – caused by lower demand and high supply too – is fresh on the mind of the Middle Eastern oil producers <http://www.reuters.com/article/2014/10/14/us-saudi-oil-policy-analysis-idUSKCN0I229320141014>, who had then cut production to try and curb prices. If the Saudi’s don’t cut production and shale oil continues to add to supply, prices are only going to come down from here. In which case, the need for a hedge is lower. What we could also do is to build a strategic petroleum reserve in India, but with certain rules. Every reserve has the potential of never using it (like our forex reserves) because oh-if-we-use-it-we’ll-have-nothing-left kind of stupidity. Such reserves are useless as reserves, like that gold you own which you will never sell. But if there are strict rules to maintain that every month, the country will set a narrow price range (say 3% above and below market); at prices above the upper end, we will first exhaust our reserve and only then buy further from the market. Below the lower limit, we buy to maintain a one month reserve. (Which can be increased over time) However we do it, the act of hedging or building a petroleum reserve should be handled by a government fund, not by the oil companies. If it’s at the oil companies, it can only be when the market is really competitive and they are allowed to have different rates at different times -- -- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE. http://www.niftyviews.com/ Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture.The administrator of www.Niftyviews.com just provide a platform for the authors to express their opinion and take no guarantee for the genuineness of the same."ANY member of this forum doesnt prepare or publish any research report; or ii. provide research report; or iii. make 'buy/sell/hold' recommendation; or iv. give price target; --- You received this message because you are subscribed to the Google Groups "Niftyviews.com" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/d/optout.
