Commodity Futures
WTI and Indian Crude Oil
Anand James, Sr. Analyst, Geojit Financial Services
Types of Crude Oil
There are about 161 different internationally traded crude oils, according to The International Crude Oil Market Handbook, 2004, published by the US Energy Intelligence Group. They vary in terms of characteristics, quality and market penetration. Of these crude oils, WTI, Brent, Dubai and OPEC Basket Price are the main price markers seen as global price reference.
WTI Crude Oil
WTI refers to West Texas Intermediate, which is mostly refined in the Midwest region of the US. It is a high quality oil with an API gravity of 39.6 degrees (making it a ‘light’ crude oil), and containing only about 0.24 per cent of sulphur (making it a ‘sweet’ crude oil). Thus being light and sweet, makes WTI ideal for refining in the US, which is the largest consumer of oil.
WTI and MCX Crude Futures
WTI Crude is the benchmark for oil futures trading in Nymex, which is the world’s largest Energy exchange. At the same time, MCX Crude oil futures contracts are broadly structured on Nymex’s contracts, and their settlement, as well as price movements match very closely.
Indian Crude
The Crude Oils that India normally imports are the Oman-Dubai sour grades and the Brent sweet, mostly in the ratio of 58:42. One main reason for preferring these sour grades over the more expensive, and high quality oils like WTI, is that the environmental standards in India permit higher sulphur content in petrol and diesel. It means that, unlike in US, India can import and refine cheap crude even though its products (petrol, diesel etc.) may contain higher sulphur content, as it is presently permissible in India. Now the big question is whether movements in WTI affect Indian petrol prices. The answer is not yet an affirmative yes for the following reasons:
1. The Crude Oils that India imports are mostly the Oman-Dubai sour grades and Brent, making the Indian import bill less elastic to WTI price moves. But to the extent that WTI is still considered as the global benchmark for Crude prices, Indian prices do not stay isolated, and respond to WTI’s price moves, sooner or later.
2. The settlement logic in MCX follows that delivery hardly happens against the futures contracts, which means that domestic oil/product prices remain largely unaffected by MCX/WTI price moves. However, high volumes in MCX crude futures and a correlation between WTI and MCX futures consistently hovering around 1, save exchange rate fluctuations, indicate that price moves in MCX are mostly market driven and could soon emerge as a benchmark for domestic crude oil prices.
3. Even though, APM* was dismantled in April 2002, the Indian prices are not purely market driven yet. This is because, the Government continues to issue directives to OMCs (Oil Marketing Companies), thus deciding the end consumer’s price indirectly to some extent. However, even though the domestic market is not as responsive as it would have been if it were purely market driven, it is much more exposed to international price volatility than earlier, though moderated through Government’s efforts. Moreover, customs duty remains high, and the OMCs continue to be paid the import price parity for the products, thus more or less assuring good refining margins, and their profitability.
*APM (Administered Price Mechanism) protected Indian consumers from high volatility in international prices, by absorbing the same through an oil pool, created for this purpose. The retail petrol/diesel prices thus remained more or less irresponsive to international prices, while the margins for the oil companies were decided by the government and met from the oil pool.