The Hindu Business Line : Rising crude prices fuel futures trade

Mumbai, June 16 The record rise in the international crude oil price has generated increased interest in futures contracts being traded on Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX).

Rising volume

Open interest in crude oil rose from about 1.2 million barrels on April 1 to over 3 million barrels on May 12 on MCX.

On NCDEX, the volume jumped was nearly 260 per cent to 19.95 lakh barrels in May.

Ms Kavita Chacko, economist, NCDEX, said: “The increased fund flow in the international market into commodities as an alternative investment given the crisis in the financial markets has fuelled the oil price rally.”

Speculators’ role

Investment interest in crude oil has increased ever since crude breached $100 a barrel. The consistent high open interest indicate that the role of speculators have shrunk while oil producers and actual users have started using the platform, said an analyst.

It makes sense to hedge as fuel accounts for 40 per cent of operating cost of aviation companies, while it is roughly 15 per cent other manufacturing companies, he added.

“Hedging in the domestic commodity market not only helps companies to save cost but also takes care of rupee-dollar volatility,” said Mr Harish Galipalli, head of research, Karvy Commodities.

Institutional investors such as pension funds, university endowments and sovereign wealth funds have increased their investments in commodities, especially in crude and gold as they are the natural hedge against inflation.

Faltering demand

The increased flow of investment funds into crude oil has maintained prices at record level despite faltering product demand in countries such as the US.

According to the International Energy Agency, global oil demand is projected to reach 86.8 million barrels per day (bpd) in 2008, an increase of one million a day over 2007. Demand from the US is expected to fall by two per cent to 20.4 million bpd which is expected to be offset by healthy demand from non-Organisation for Economic Co-operation and Development (OECD) countries and emerging economies such as India and China.

The projected overall OECD oil demand is 48.8 million bpd and non-OECD demand is forecasted to be 38.1 million bpd in 2008.OPEC too has lowered its world oil demand for 2008 by 0.2 million bpd to 86.95 million bpd.

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