Why India Needs Petroleum Spot Exchange

Petroleum products consumption in a country is one of the important indicators for growth of that country. With the growth in consumption, the oil industry gets into mode of changes like building new refineries, storage points, pipelines and import facilities. India is going through all these changes and much more.

The most important aspect which should also grow with this growth in the industry is the system which takes care of the changing mode and intricacies of the changing time. Particularly supply and distribution, indenting, credit facilities, payment and the process to deal with risks associated with it.

The retail outlet trade of petrol and diesel in India has changed a lot like having better retail outlets, dispensing units, better payment and delivery systems. And most important, the daily price change of petrol and diesel. However, the industrial segment has not seen any significant changes over the period. The price of industrial products like fuel and solvents are still changed every fortnight or monthly basis. Most of the large consumers do get some bargaining advantages if they agree to go in contract for supplies to a particular company.

Cartelization is the game

This is a fair world but not at all times. The world body of petroleum is the largest cartel Known as OPEC (Organization of Oil Producing Countries). To maximize profit and to ensure that world citizen do not get a fair deal they cartelize and control production to keep the crude prices favorable to them.

Look at the oil companies of any country, there are government and private major oil companies. They are price sensitive and they ensure that their prices are always cost, plus a fat margin. Even the government oil companies cartelize with other govt. and private companies to ensure that they keep the product prices high. These cartelization profits not only give a good return to the shareholders but also helps to cover up their inefficiencies and corruption.

In India the interdependence of oil companies is very high. They have refineries at very few locations and from these locations the meeting full requirements of customers at all nook and corner is physically and profitably is not possible. If they do not buy and sale amongst themselves, it will be impossible to retain clients. Without help from each other they will become regional players. Hence for mutual benefit, they agree to a name plate prices for industrial products. Now the game of discount offers starts. As a customer you may not see any logic, or similarity and or transparency. Depending upon your volume, closeness to the supply location and your able to convince the company official that why you should get a better discount, the rate is decided. May be the customer lands up signing a compulsory yearly contract.

How Petroleum Spot exchange (PetEx) help Customers

The most important and soul of the PetEx is the transparency, dependable, convenient and at best price. The large number of buyers reach out to large number of suppliers. The sellers and buyers are inducted to the exchange only after due KYC and ensuring that they have valid licences needed to buy / sale the products.

PetEx is the first and only platform in India, which provides opportunity to negotiate buy and sale of the products on a live platform, on daily basis. You may take a position after comparing the prices offered by different companies and from different locations.

At its full operation the products proposed to be offered in PetEx are Crude Oil, Pet coke, Furnace Oil, Aviation Turbine Fuel (ATF), Naphtha, Light Diesel Oil, Liquefied Petroleum Gas (LPG), Propane, Bitumen, Kerosene, Base oil, Bio-Diesel, Methanol, Ethanol, solvents (Toluene, Benzene, Xylene, MTO, SBP etc.). Natural Gas / CNG / LNG, Motor Spirit (MS), High Speed Diesel (HSD) etc. PetEx shall also offer Petrochemicals and Chemical in due course of time.

PetEx is a very innovative business process and first of its kind in India. It intends to create convenience with the use of latest software technology and a value for real-time transaction for buying and selling of petroleum products. PetEx looks forward to partnering with various stakeholders and bring a change in the Petroleum Eco system.

Market Making In PetEx

What is Market Making in e-Market Platform for Petroleum products ?

Broadly speaking Market Making is a process where a Market Maker / Trader gives quote from both Buy and Sale side. Market Maker gives a lower buy (bid) quote and higher asking (Sale) quote. The difference between both the quote is known as Spread, and this is the profit of the Market Maker.

In India, Institutional (Direct) Market of Petroleum product is totally dominated by public sector (PSU) and their JV oil companies. The prices are fixed fortnightly for fuels and Bitumen etc., whereas the prices of solvents and other products are fixed on monthly basis. Due to the pre-determined dates of price announcements it is easy for market makers and traders to speculate and make profit without any major risk. The benefit is most often tilted in favour of buyers / Investors. The oil companies follow the Brent crude price as its marker, which makes it more interesting for the speculators, since they know the international crude oil trend well in advance.

What is market making strategy ?

Strategy is simple – if the Brent crude price is going up during the fortnight, buyer can expect the prices to go up. Buyer starts taking supplies from 11th to 15 and from 25th to 30th of the month.  As soon as the prices go up on 16th or 1st of the month, he starts liquidating the stock at fairly good profit. If the prices are expected to go down the strategy can simply be reversed.

Role of a Market Maker ?

System of Market makers is more prevalent in equity markets. However, in e-markets like PetEx a Business partner (PBP) plays almost similar role to provide liquidity, convenience and services to the end user.

Major Petroleum companies in India does the supplies on pre-payment facility (DD or Cheque in advance or DD / Cheque at site) i.e. the buyer must make the payment before taking delivery of the product. Some large or dedicated customers open Bank guarantee to get credit from oil companies. In other cases the dealer / trader makes the payment to the oil company and extends the credit to the end users. These dealers / traders are the real Market Makers for the industry, who do trade by ensuring back to back buy and sale quotes.

Can Market Maker lose money in e-market ?

As explained in the market making strategy, the Market Maker on most of the trades makes a profit. Not only he gives back to back quotes but he can also always understand the direction of the trade and take a position suitably.

A market maker while making sales also provides the transportation for the product, because the client’s preference is always delivered supply to the plant site. The market maker makes easily 5% to 10% of the transportation freight usually paid by the customer. Presently, the transporter is paid after 45 days of making the supplies, where as the buyers make the payment of transportation along with the cost of product, as soon as the product is delivered.

How can I become Market Maker in PetEx ?

In the world of digitisation, India takes one more step towards offering fast, transparent and efficient market for petroleum product on a digital platform. The key feature of PetEx is, every trade will result in delivery i.e. PetEx is a platform for buyers and sellers of petroleum products in Physical (spot) market. All the trades will have full and final settlement within 3 to11 days of trade.

There are several petroleum products like Petrol, Diesel, Benzene etc., where you need several licenses for storage and trading. There are other products like Furnace oil, LDO, Base oil, Bitumen etc. where you do not need any major licences to trade. The licences usually needed for general trading should be adequate to start the business.

PetEx offers its membership, PetEx Business Partner (PBP), who can act like a Market maker. The oil companies particularly Govt. oil companies supply products only to the clients enrolled with them and hence the market maker is very safe because he does the trading for a bonafide client.

The Products offered in PetEx are Furnace Oil, Aviation Turbine Fuel (ATF), Naphtha, Light Diesel Oil, Liquefied Petroleum Gas (LPG), Propane, Bitumen, Kerosene, Base oil, Bitumen, Bio-Diesel, Methanol, Ethanol, solvents (Toluene, Benzene, Xylene, MTO, SBP etc.). PetEx has also provision to offer Petrochemicals, Chemical and other energy products in its platform.