Wary of crude's $100 fling, IndianOil readies to step up hedging
New Delhi   22-Nov-2007
SV Narasimhan is a worried man. Being the director (finance) of India's largest refining company IndianOil is not an easy job at the best of times. His company's crude oil import bill last year was close to Rs 90,000 crore, and with the commodity now about to cross the $ 100 per barrel-mark, the bill may cross Rs 1,00,000 crore. Apart from the loss IndianOil is making on petro-product sales, Mr Narasimhan's biggest dilemma is what his call should be in the oil futures market. Private sector companies such as Reliance Industries and Essar Oil have been active in the international exchanges with paper as well as physical trades on them. However, public sector refiners IndianOil, Hindustan Petroleum and Bharat Petroleum have refrained from hedging big time despite getting RBI's permission in 2004. The companies have made limited progress and are primarily hedging refining margins on a one-to-one basis with known counter parties. The latest RBI notification allows them even more flexibility to hedge foreign exchange exposures to the extent of 50% of their oil inventory volumes. IndianOil now hedges up to 5% of its margins and is planning to increase the exposure to up to 10% by next year. The problem arises in taking a call on prices, because oil prices have been volatile in the past and can fall in the future. "The real issue is whether anyone is prepared to take that kind of heat in a public sector company," said an oil company source. Speaking to ET last week, Mr Narasimhan had said: "We have to draw a line on hedging and take a consensus decision. So far, we used hedge mostly on refining margins. Now, we can also hedge up to 50% of our inventory and we have to take a call on this." The issue of increasing exposure is likely the company’s board take up. IndianOil maintains a 14-day inventory worth over Rs 10,500 crore. The company, which hedges a little on the local commodity exchanges, now plans to start trading on the New York Mercantile Exchange (Nymex), while HPCL and BPCL plan to start trading on the domestic exchanges.