Arjun Report

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    Reg No: 2009201010

    Under the guidance of

    Prof. Prem Raj,

    Assistant Professor, Anna University, Chennai.

    Submitted in partial fulfillment of the requirement for the award

    of the degree of



    MAY 2011

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    The rise in commodity investing that started in 2003, many have asked whether commodities

    now move more in sync with traditional financial assets. Using monthly data over 5 years,

    this article provides evidence largely to the contrary. First, dynamic conditional correlation

    and recursive co-integration techniques are applied to the prices of, and the returns on, key

    investable commodity and National Stock Exchange equity indices. Compared to the 2005

    2010 period, both short- and long-term relationships between passive commodity and equity

    investments are generally weaker after 2008. Even though the correlations between equity

    and commodity returns increased sharply in the fall of 2008, during a time of extraordinary

    economic and financial turbulence, they remained lower than their peaks in the previous

    years. Second, the co-movements between equity and commodity returns in periods of

    extreme returns are analyzed. There is little evidence of a secular increase in spillovers from

    equity to commodity markets during extreme events. Overall, the results suggest that while

    commodities provide substantial diversification benefits to passive equity investors, those

    benefits are weaker precisely when they are needed most. In this article we would be seeing

    the impact of energy price and metal sector stocks due to the price movement in crude oil

    price and metals.


    The trading of commodities consists of direct physical trading and derivatives trading.

    Exchange traded commodities have seen an upturn in the volume of trading since the start of

    the decade. This was largely a result of the growing attraction of commodities as an asset

    class and a proliferation of investment options which has made it easier to access this market.

    The global volume of commodities contracts traded on exchanges increased by a fifth in

    2010, and a half since 2008, to around 2.5 billion million contracts. During the three years up

    to the end of 2010, global physical exports of commodities fell by 2%, while the outstanding

    value of OTC commodities derivatives declined by two-thirds as investors reduced risk

    following a five-fold increase in value outstanding in the previous three years. Trading on

    exchanges in China and India has gained in importance in recent years due to their emergence

    as significant commodities consumers and producers. China accounted for more than 60% of

    exchange-traded commodities in 2009, up on its 40% share in the previous year.

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    Commodity assets under management more than doubled between 2008 and 2010 to nearly

    $380bn. Inflows into the sector totalled over $60bn in 2010, the second highest year on

    record, down from the record $72bn allocated to commodities funds in the previous year. The

    bulk of funds went into precious metals and energy products. The growth in prices of many

    commodities in 2010 contributed to the increase in the value of commodities funds under


    Spot trading

    Spot trading is any transaction where delivery either takes place immediately, or with a

    minimum lag between the trade and delivery due to technical constraints. Spot trading

    normally involves visual inspection of the commodity or a sample of the commodity, and iscarried out in markets such as wholesale markets. Commodity markets, on the other hand,

    require the existence of agreed standards so that trades can be made without visual


    Forward contracts

    A forward contract is an agreement between two parties to exchange at some fixed future

    date a given quantity of a commodity for a price defined today. The fixed price today isknown as the forward price.

    Futures contracts

    A futures contract has the same general features as a forward contract but is transacted

    through a futures exchange.

    Commodity and futures contracts are based on whats termed forward contracts. Early onthese forward contracts agreements to buy now, pay and deliver later were used as a

    way of getting products from producer to the consumer. These typically were only for food

    and agricultural products. Forward contracts have evolved and have been standardized into

    what we know today as futures contracts. Although more complex today, early forward

    contracts. In essence, a futures contract is a standardized forward contract in which the buyer

    and the seller accept the terms in regards to product, grade, quantity and location and are only

    free to negotiate the price .
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    Hedging insures against a poor harvest by purchasing futures contracts in the same

    commodity. If the cooperative has significantly less of its product to sell due to weather or

    insects, it makes up for that loss with a profit on the markets, since the overall supply of the

    crop is short everywhere that suffered the same conditions.

    Delivery and condition guarantees

    In addition, delivery day, method of settlement and delivery point must all be specified.

    Typically, trading must end two (or more) business days prior to the delivery day, so that the

    routing of the shipment can be finalized via ship or rail, and payment can be settled when the

    contract arrives at any delivery point.

    Regulation of commodity markets

    Commodities' spot and forward prices are solely dependent on the financial return of the

    instrument, and do not factor into the price any societal costs, Nonetheless, new markets and

    instruments have been created in order to address the external costs of using these

    commodities such as man-made global warming, deforestation, and general pollution. In the

    United States, the principal regulator of commodity and futures markets is the Commodity

    Futures Trading Commission but it is the National Futures Association that enforces rules

    and regulations put forth by the CFTC. In India, the important market for commodity trading

    is MCX and NCDEX.


    Building on the infrastructure and credit and settlement networks established for food and precious metals, many such markets have proliferated drastically in the late 20th century. Oil

    was the first form of energy so widely traded, and the fluctuations in the oil markets are of

    particular political interest.

    Some commodity market speculation is directly related to the stability of certain states, e.g.

    during the Persian Gulf War, speculation on the survival of the regime of Saddam Hussein in

    Iraq , Gaddafi of Libya, Hosni Mubarak of Egypt.
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    The oil market is an exception. Most markets are not so tied to the politics of volatile regions

    - even natural gas tends to be more stable, as it is not traded across oceans by tanker as


    Commodity markets and protectionism

    Developing countries (democratic or not) have been moved to harden their currencies, accept

    IMF rules, join the WTO , and submit to a broad regime of reforms that amount to a hedge

    against being isolated. China's entry into the WTO signalled the end of truly isolated nations

    entirely managing their own currency and affairs. The need for stable currency and

    predictable clearing and rules-based handling of trade disputes, has led to a global trade

    hegemony - many nations hedging on a global scale against each other's anticipated protectionism , were they to fail to join the WTO.

    Commodity Exchanges:

    Exchange CountryCME Group USATokyo Commodity Exchange Japan

    NYSE Euronext EU

    Dalian Commodity Exchange ChinaMulti Commodity Exchange IndiaIntercontinental Exchange USA, Canada, China, UK


    Organized commodity derivatives in India started as early as 1875, barely about a decade

    after they started in Chicago. Many feared that derivatives fuelled unnecessary speculation

    and were detrimental to the healthy functioning of the markets for the underlying

    commodities. As a result, after independence, commodity options trading and cash settlement

    of commodity futures were banned in 1952. A further blow came in 1960s when, following

    several years of severe draughts that forced many farmers to default on forward contracts

    (and even caused some suicides), forward trading was banned in many commodities

    considered primary or essential. Consequently, the commodities derivative markets

    dismantled and remained dormant for about four decades until the new millennium when the

    Government, in a complete change in policy, started actively encouraging the commodity

    derivatives market. Since 2002, the commodities futures market in India has experienced an
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    unprecedented boom in terms of the number of modern exchanges, number of commodities

    allowed for derivatives trading as well as the value of futures trading in commodities, which

    might cross the $ 1 Trillion mark in 2006. However,there are several impediments to be

    overcome and issues to be decided for sustainable development of the market.

    After the Indian economy embarked upon the process of liberalization and globalisation in

    1990, the Government set up a Committee in 1993 to examine the role of futures trading. The

    Committee recommended allowing futures trading in 17 commodity groups. It also

    recommended strengthening of the Forward Markets Commission, and certain amendments

    to Forward Contracts (Regulation) Act 1952, particularly allowing options trading in goods

    and registration of brokers with Forward Markets Commission. The Government accepted

    most of these recommendations and futures trading was permitted in all recommended

    commodities. Finally a realization that derivatives do perform a role in risk management led

    the government to change its stance. The policy changes favouring commodity derivatives

    were also facilitated by the enhanced role assigned to free market forces under the new

    liberalization policy of the Government. Indeed, it was a timely decision too, since

    internationally the commodity cycle is on the upswing and the next decade is being touted as

    the decade of commodities.

    Need for Commodity Derivative:

    India is among the top-5 producers of most of the commodities, in addition to being a major

    consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of

    the Indian economy. It employees around 57% of the labor force on a total of 163 million

    hectares of land. Agriculture sector is an imposrtant factor in achieving a GDP growth of 8-

    10%. All this indicates that India can be promoted as a major center for trading of

    commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to

    1980s suppressed the very markets it was supposed to encourage and nurture to grow with

    times. It was a mistake other emerging economies of the world would want to avoid.

    However, it is not in India alone that derivatives were suspected of creating too much

    speculation that would be to the detriment of the healthy growth of the markets and the

    farmers. Such suspicions might normally arise due to a misunderstanding of the

    characteristics and role of derivative product. It is important to understand why commodity

    derivatives are required and the role they can play in risk management. It is common

    knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The

    possibility of adverse price changes in future creates risk for businesses.Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes.

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    A derivative is a financial contract whose price depends on, or is derived from, the price of

    another asset. Two important derivatives are futures and options.

    (i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a

    commodity for a predetermined delivery price at a specific future time. Futures are

    standardized contracts that are traded on organized futures exchanges that ensure

    performance of the contracts and thus remove the default risk. The commodity futures have

    existed since the Chicago Board of Trade (CBOT, was established in 1848

    to bring farmers and merchants together. The major function of futures markets is to transfer

    price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop

    of wheat to be ready in two months time, but is worried that the price of wheat may decline

    in this period. In order to minimize his risk, he can enter into a futures contract to sell his

    crop in two months time at a price determined now. This way he is able to hedge his risk

    arising from a possible adverse change in the price of his commodity.

    (ii) Commodity Options contracts: Like futures, options are also financial instruments used

    for hedging and speculation. The commodity option holder has the right, but not the

    obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or

    before a specified date. Option contracts involve two parties the seller of the option writes

    the option in favour of the buyer (holder) who pays a certain premium to the seller as a price

    for the option. There are two types of commodity options: a call option gives the holder a

    right to buy a commodity at an agreed price, while a put option gives the holder a right to

    sell a commodity at an agreed price on or before a specified date (called expiry date). The

    option holder will exercise the option only if it is beneficial to him; otherwise he will let the

    option lapse.


    Most casual stock market investors do not pay too much attention to the current price of the

    various different commodities such as oil, gold and copper, for example. However these

    current prices can have a major bearing on the value of the main stock market indices.

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    Just take a look at the NIFTY companies. This is a weighted index meaning that the

    companies with the largest market capitalisation such as Reliance, Tata Steel have more of an

    impact on the value of the NIFTY than the smaller ones.

    We can see that the company with the highest market capitalisation is Reliance, whose share

    price is obviously heavily influenced by the price of crude oil.These are all mining companies

    whose share price is determined to a large extent by the price of the various commodities.

    At the moment the price of various commodities including copper, gold, lead, nickel and

    silver are all trading at very high levels on both a yearly and historical basis. As a result the

    share prices of the major mining companies have been driven higher because they obviously

    make more money selling these commodities when the price is higher.

    The knock-on effect of this is that the NIFTY,which includes many of these mining

    companies, and indeed is heavily influenced by them because they all have significant market

    capitalisation values, has been driven higher as a result of this. If commodity prices were to

    drop sharply, you would undoubtedly see the value of both the individual mining stocks and

    the FTSE 100 as a whole fall sharply as well because they are very closely correlated.

    So the point I want to get across in this article is that it is very important that you keep your eye on commodity prices because they have a major impact on the main stock market indices.

    When commodity prices are high, the main stock market will also generally be trading at high

    levels as well, whilst the reverse is true when commodity prices are at very low levels. For

    long term investors the bargains are to be had when commodity prices are low, but that seems

    a long way off at the moment


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    Dream Plan Achieve

    Acumen believes that life is all about dreaming a big dream, planning how to make that dream come

    true and then working towards achieving it. That is the driving force. And that is what they help thier

    clients and associates to do. The DreamCut to 1996: The Indian markets were still very small, largely unorganized, and more or less a closed

    &opaque market. A group of professional stockbrokers dreamed of changing that. The dream was to

    spread the equity market cult across the country and making investing a pleasant experience. The Ideawas to take the markets to the investors instead of the investors having to come to the markets and to

    give them fair, transparent efficient & time bound services. It was with this dream that the Acumen

    group was born.

    The PlanA lot of planning was required to achieve the lofty dreams that the promoters had. The 5 most

    important areas were identified :

    Great Human resource Entire range of financial products Great Technology Great Research and awareness programmes

    Great Infrastructure & Reach

    Once the fundamentals were identified, we set about the putting the plan into action. A good team was put in place, and HR policies were chalked out to fairly reward and retain our human talents.

    Memberships of all the leading exchanges, both in the capital markets (BSE & NSE for both Cash and

    futures segment), commodities markets (MCX, NCDEX and NMCE) and currency markets (NSE &

    MCX SX) were taken, as was that of NSDL for depository operations, and portfolio management

    license for managing client portfolios. We also took membership of DGCX, an international commodity

    and currency exchange based in Dubai. We are also members of the MCX SX.

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    We now offer all financial products to our clients :

    Equity trading

    Commodity trading

    Currency Futures

    Interest Rate Futures

    Depository Services

    Mutual funds



    Acumen Group , formerly Peninsular Group is a pioneer player in the Indian capital market, since 1996,

    promoted by a group of professional stockbrokers. Group having Security Market membership in NSE,

    NSE Derivatives, BSE, NSDL and Commodity Market membership in MCX, NCDEX, NMCE and


    At Acumen, we promise to keep to rediscovering ourselves & redefining our services to ensure that we

    deliver what we dreamt and promised to deliver : Online Trading in NSE, BSE cash and Derivatives segments Web Trading in all segments Daily Pre-Market outlook over e-mail Intra-day Market Commentary Trading Tips and Breaking news over SMS

    Personalised Investment Advises


    Quality Policy : We commit ourselves to deliver services that best meet our clients satisfaction;

    protection to our clients money maximizing the opportunities and minimizing the risk. We further

    commit to get things right, the first time, to deliver the best value for money & time to our customers.

    We will continuously invest in our people and technologies and keep our people abreast with the latest

    changes & developments, information and technologies. to deliver quality & unparalleled service.

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    Excellent Customer Service : We strive to provide our customers with the best and the most reliable

    service while offering the best in todays market environment.

    Multiple Trading Platforms : We offer some of the best trading platforms available today. With

    platforms ranging from the most user friendly to the latest technology best, like trade in all exchanges

    through a single VSAT on a single computer etc.

    Expertise : Acumen is dedicated to provide you with the exceptional commodity future trading expertise

    from trade inception to execution. Our team of commodity professionals work round the clock to

    provide you the best solutions for your trade.

    Education & Communication: We place high priorities on client education, awareness &


    History of Commodity Futures

    Pages from world history say that Commodity Futures was first introduced to the world by a Wheat

    farmer in Chicago in 1820, and by 1840 the organised Commodity Futures Exchange was formed in

    Chicago by the Wheat Farmers. In India, Commodities trading began with cotton in 1845. Over the last 5

    years, with the launch of tech savvy National Commodity Exchanges, having reach all over the country

    and dealing in almost all commodities, trading has exploded. Commodities have now emerged as a

    separate asset class, helping investors to diversify their portfolios.

    Farmers can now sell their produce whenever they feel that the price is right, even before they actuallyharvest the crop. To the traders, exporters and manufactures, commodity futures is one best available

    option or procuring their required raw materials, judging the market movements, and to plan their

    operations suitably. There are also good opportunities for financiers & traders.

    Using Commodity trading to your advantage :

    Trading commodities enables you to participate in broad market moves or within specialized sectors.

    Energy moves the world, you have seen oil prices rise and fall Gold is constantly in the news, ever

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    vigilant for inflation or geo-political trouble Food, Grains, Precious and Industrial Metals these are

    all part of this world. So these products are widely used by financial professionals as well as individual

    investors, for portfolio protection as well as investment reward.

    Benefits of online commodity trading :

    Online screen based futures trading in about 85 commodities. Possibilities for attractive returns based on risk reward ratios. Excellent hedging tool against price risk. High Liquidity in most contracts. 100% transparency, regulated by Forward Market Commission. Physical delivery as well as delivery in demats form. Adequate warehousing, testing facilities.

    Ability to leverage larger positions due to relatively lower margins.DEPOSITORY SERVICES

    Your assets, at your finger tips

    The Indian capital market went through a major transformation with the introduction of the depository

    system which replaced the paper-based settlement of trades. The depository system is one in which

    securities are held electronically and transactions are processed by book entry. In the depository system,

    securities are held in depository accounts similar to bank accounts. The depository system links the

    issuers, the depository, the depository participants (DPs), and clearing houses of stock exchanges,

    facilitates holding of securities in dematerialised form and effects transfers by means of accounttransfers. This method does away with all the risks and hassles normally associated with paperwork and

    also lower the cost of transactions.

    99 per cent of trading of shares in India has been dematerialised. Around 7383 companies along with a

    host of debt instruments and commercial; papers are available for Demat.

    Acumen which began its Depository operations as early as 1999, is a depository participant with NSDL,

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    Indias first Depository. The operations of Acumens depository services are managed by a well-knit

    team of dedicated, professionally qualified staff member who leave no stone unturned in their goal of

    Customer Delight, offering you not only a host of services like demat, remat, security transfer, pledge

    creation but also value added services like 24X7 online holdings, transaction statements, accountstatements etc. - at costs that are among the most reasonable in the industry.


    The analyze for understanding the impact of commodity price towards the stock market would help to

    determine the correlation over both commodity price and particular sector stock price. There would

    many assumptions in this regard so as to understand the correlation between both stock price and

    commodity price.

    Investors are not aware of prevailing commodity price.

    Stock price would fluctuate based on the global political and economic scenario.

    The number of literature on the topic is many.


    To understand the commodity price impact over stock price.

    To analyze the stock pricess with commodity price and find out the correlation

    between both set of prices.

    To achieve the gain in stock market based on commodity futures.

    To suggest the organization for giving their clients a knowledge of commodity pricesinfluences in stock market and it would help the clients in understanding which sector

    stocks to buy based on commodity price


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    1.8.1. SCOPE

    The time periods for all the data which are taken for different commodities would differ from

    the year 2005 to 2010. Data would be solved based on the fundamental analysis and then it

    would be given due weightage for each company stock price and it enhances the scope of

    stock price over comparison with commodity price. These correlation comparison would be

    prevalent and enhances the due scope of correlation and regression analysis


    The data for commodity price which includes crude oil and metals was taken from and stock price of reliance industries, BPCL, IOC had been took from over the years of 2006 to 2010.

    Data relating to stock prices of various companies would differ due to bonus issue and split of

    stocks, so those stock prices has been brought into single level and these stocks are being

    priced uniformly and it would help in finding the correlation and relationship between stock

    prices and the corresponding commodity price wherein these companies would be mainly

    concentrated on the production process. This uniformity would finally bring in the

    corresponding development of relationship and would establish better and more common

    system in place.


    Crude oil price would frequently fluctuate based on the global production.

    Government subsidy for petroleum products has been changed over the period of


    There will be sustainable increase or decrease of oil prices based on politicalenvironment prevailing throughout the globe.

    Metal price change considerably low.

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    Futures markets contribute in two important ways to the organization of economic activity: i)

    they facilitate price discovery; and ii) they offer means of transferring risk or hedging. Price

    discovery refers to the use of futures prices for pricing cash market transactions. In general,

    price discovery is the process of uncovering an assets full information or permanent value.

    The unobservable permanent price reflects the fundamental value of the stock or commodity.

    It is distinct from the observable price, which can be decomposed into its fundamental value

    and transitory effects. The latter consists of price movements due to factors such as bid-ask

    bounce, temporary order imbalances or inventory adjustments. Whether the spot or the

    futures market is the center of price discovery in commodity markets has for a long time been

    discussed in the literature. Stein showed that futures and spot prices for a given commodityare determined simultaneously. Garbade and Silber develop a model of simultaneous price

    dynamics in which they establish that price discovery takes place in the market with highest

    number of participants. Their empirical application concludes that about 75 percent of new

    information is incorporated first in the futures prices. More recently, the price discovery

    research has focused on microstructure models and on methods to measure it. This line of

    literature applies two methodologies. Our paper suggests a practical econometric approach to

    characterize and measure the phenomenon of price discovery by demonstrating the existenceof a perfect link between an extended GS theoretical model and the PT decomposition.

    Building on GS, we develop an equilibrium model of commodity spot and futures prices

    where the elasticity of arbitrage services, contrary to the standard assumption of being

    infinite, is considered to be finite, and the existence of convenience yields is endogenously

    modeled as a linear combination of st and ft satisfying the standard no-arbitrage condition.

    The assumption of finite elasticity is more realistic since it reflects the existence of factors

    such as basis risks, storage costs, convenience yields, etc. Convenience yields are natural

    for goods, like art or land, that offer exogenous rental or service flows over time. It is

    observed in commodities, such as agricultural products, industrial metals and energy, which

    are consumed at a single point in time. Convenience yields and subsequent price

    backwardations have attracted considerable attention in the literature. By explicitly

    incorporating and modelling convenience yields, we are able to detect the existence of

    backwardation and contango in the long-run equilibrium relationship between spot and

    futures prices. In our model, this is reflected on a cointegrating vector, (1, - b2 ), different

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    from the standard b2 = 1. When b2 > 1 ( < 1) the market is under long run backwardation. As

    a by-product of this modeling we find a theoretical justification for a cointegrating vector

    between log-variables different from the standard ( 1, -1 ). To the best of our knowledge, this

    is the first time this has been formally considered in this literature. Independent of the value

    of b2, this paper shows that the proposed equilibrium model not only implies cointegration;

    but it leads into an economically meaningful Error Correction Representation (see Engle and

    Granger, 1987). The weights defining the linear combination of st and ft that constitute the

    common permanent component in the PT decomposition, coincide exactly with the price

    discovery parameters proposed by GS. These weights depend on the elasticity of arbitrage

    services and are determined by the liquidity traded in the spot and in the futures market. This

    result not only offers a theoretical justification for the PT decomposition; but it provides a

    simple way of detecting which of the two prices is long run dominant in the price discovery

    process. Information on price discovery is important because spot and futures markets are

    widely used by firms engaged in the production, marketing and processing of commodities.

    Consumption and production decisions depend on the price signals from these markets.

    All the results produced in the paper can easily be tested as may be seen directly from our

    application to London Metal Exchange (LME) data. We are interested in these metal

    markets because they have highly developed futures contracts in equilibrium. This is

    reflected in a cointegrated slope greater than one, and the futures price is information

    dominant for all metals with a liquid futures markets: Aluminium (Al), Copper (Cu), Nickel

    (Ni) and Zinc (Zn). The spot price is information dominant for Lead (Pb), the least liquid

    LME contract.The paper is organized as follows. Section 2 describes the equilibrium model

    with finite elasticity of supply of arbitrage services incorporating endogenously convenience

    yields. It demonstrates that the model admits an economically meaningful Error Correction

    Representation, and derives the contribution of the spot and futures prices to the price

    discovery process. In addition, it shows that the weights of the linear combination defining

    price discovery in the PT metric, correspond to the price discovery parameters proposed by

    GS. Section 3 discusses the theoretical econometric background of the two techniques

    available to measure price discovery, the Hasbroucks IS and the PT of Gonzalo-Granger.

    Section 4 presents empirical estimates of the model developed in section 2 for five LME

    traded metals, it tests for cointegration and the presence of long run backwardation ( 2 > 1),

    and estimates the contribution of the spot and futures prices to price discovery, testing the

    hypothesis of the futures price being the sole contributor to price discovery. A by-productof this section is the computation of the unobserved convenience yields for all commodities.

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    The widespread reliance on natural gas commodity markets to set the price paid by

    consumers is an extremely recent phenomenon, just over 15 years old. As evidenced by the

    wild, irrational swings in natural gas prices, these new markets have not worked very well.

    They are deemed to be inefficient in technical academic studies and have a history of

    manipulation, abuse and misreporting. Second, natural gas has supply and demand

    characteristics that make it vulnerable to abuse and volatility, yet the markets in which

    wholesale natural gas prices are set are less regulated than many other commodity markets.

    Many in the industry believe these markets lack transparency and are vulnerable to abuse and

    manipulation. Regulators have failed to lay these concerns to rest because the vast majority of

    gas trading is subject to little monitoring or oversight. While regulators and policymakers

    have been scrambling to reform the market rules for this commodity, they have yet to impose

    comprehensive oversight and accountability.

    Physical market fundamentals a tight supply/demand balance are not adequate to

    explain either the short-term or long-term behavior of natural gas prices. This does not mean

    that tight markets do not matter of course they do but identifying physical market

    fundamentals is only the beginning.

    Tight markets reflect public policies and strategic behaviors, not just Mother Nature. To

    the extent that Mother Nature is a wild card, policymakers can and should create systems

    that are less vulnerable and better able to mitigate the impact of supply shocks. Natural gas

    commodity markets have exhibited erratic behavior and a massive increase in trading that

    contributes to both volatility and the upward trend in prices. The rules can be changed to

    moderate these effects. The incentive structures and distribution of bargaining power in the

    physical and financial markets for natural gas are unnecessarily tilted against the consumer.

    Public policy can and should ensure a better balance. When we look for answers, we end up

    in Washington, D.C., where jurisdiction over the interstate natural gas system at issue resides.

    All of the major determinants of the wildly fluctuating price of natural gas in recent years

    the physical (wellhead and pipeline) markets and the financial commodity markets are

    under federal authority, but policy makers have failed to take the steps necessary to protect

    the public. The long-term fundamentals of supply and demand do not support the current high

    price of gas. Demand has not been surging, soaring or skyrocketing, as is frequently

    reported in the press (see Exhibit ES-2). Over the past ten years it has been relatively flat,

    with a slight moderation of the winter peak. Over the past three years, it has declined slightly.

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    Traditional supply and demand analysis would suggest that prices should be similar, or

    even a little lower than they were over the past two years, yet prices are running about $3.00

    higher, up over 60 percent at the wellhead and in the spot market. Future prices are even

    higher still, running about 40 percent above current prices. They are about twice as high as

    the estimated long run costs of production. Assurances that things will settle down three or

    four years in the future are cold comfort. A $3.00 price difference costs consumers about $5

    billion per month. The massive increases in cash flow enjoyed by the industry in recent years

    have not been used to expand supply. Sluggish investment keeps supplies tight. There are

    several ways in which financial markets may be magnifying the upwardly volatile spiral of

    prices and contribute to the ratchet. Financial markets thrive on volatility and volume, but

    volatility and volume have costs. Producers of gas demand to be paid a higher premium to

    bring their gas to market sooner rather than later. Traders demand to be rewarded for the risks

    they incur, risks that are increased by the trading process itself. The influx of traders fuels

    volatility and raises concerns about abusive or manipulative trading practices. Econometric

    analyses of the natural gas markets in recent years raise important questions as to how well

    the natural gas markets work. Given the uncertainty about the functioning of these markets,

    the claim that the market price is always right because it is the market price should be


    The economic analysis does not support the claim that these markets operate efficiently

    to establish prices. Risk premiums, which raise the price substantially (10 to 20 percent), are

    high and rising. Prices are well above the underlying costs of production. The operation of

    financial markets is no accident. Trading reflects the rules that are established by law and

    through self-organization. The most troubling aspect of natural gas trading is that policy

    makers really cannot decipher what goes on the majority of transactions take place in markets

    that are largely unregulated. These over-the-counter markets, reported in unaudited,

    unregulated indices, are a major factor in setting the price of natural gas. And these

    unaudited, unregulated markets have behaved very poorly in recent years, with numerous

    instances of misreporting of prices. Even where there is light-handed regulation, the rules are

    inadequate to protect the public, A small number of large players can influence the price that

    consumers pay in a very short period of time and under circumstances that place the

    consumer at risk. Index prices are often based on a small number of self-reported transactions

    and there are no mechanisms for determining if such transactions represent an accurate

    sampling of the natural gas market. When even the hint of accountability was imposed bymerely being asked to certify the veracity of reported transactions, traders stopped reporting.

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    The Exhibit below shows dramatically this phenomenon. The actual volume of trading did

    not dry up. Only the reporting of the volume did. Thus, while some may be satisfied with

    recent market reforms and enforcement efforts, many others are not. The natural gas market

    lacks the most basic elements of transparency that are necessary to send proper price signals.

    The sad irony is that the markets for natural gas (a commodity which is a vital necessity

    for many Americans) are subject to far less regulation than most other commodities, most

    of which are far less crucial to consumers everyday lives. Most people can live without

    pork bellies, soybeans or orange juice; but they cannot live without natural gas for heating.

    Over time, commodity price movements follow a similar pattern. Wheat has been trending

    down in price for about 8 months. Then it stops trending down, and the price stays in a

    sideways trading range for 2 months. This 2 month sideways trading range is a base of

    accumulation. This tends to be a more quiet period where prices are bottoming out. The next

    phase is when the price moves up, and out of the accumulation trading range. The price broke

    out of the 2 month trading range, and is now poised to continue higher. There will be

    intermittent price reactions downward during the main upward price movement, but overall

    prices will move up. After a major upward price movement, usually many months or longer,

    there is a topping out period. This is also called a distribution period. It tends to be a volatile

    period, with prices sometimes wildly swinging up and down. Eventually prices start to fallwith intermittent rallies until we get to a new sideways trading range again, also known as a

    base of accumulation. Then the whole process starts all over again. This is the pattern of a

    normal recurring process that commodity price movements go through. First, you have

    accumulation, and then prices go up. Then you have distribution, and prices go down.

    Overall, prices tend to go down faster than up. It is important to become proficient at chart

    reading, also known as technical analysis. This gives you a huge advantage whether you are

    trading the commodities market or the stock market. The key to successful trading is toalways have as many factors as possible in your favor, before taking a position in the market.

    If you do that, and implement sound money management, you are now trading like a real pro.

  • 8/6/2019 Arjun Report



    3.1. Introduction

    Crude oil prices behave much as any other commodity with wide price swings in times of

    shortage or oversupply. The crude oil price cycle may extend over several years responding

    to changes in demand as well as OPEC and non-OPEC supply.

    The U.S. petroleum industry's price was heavily regulated through production or price

    controls throughout much of the twentieth century. In the post World War II era U.S. oil

    prices at the wellhead averaged $26.64 per barrel adjusted for inflation to 2008 dollars. In the

    absence of price controls, the U.S. price would have tracked the world price averaging

    $28.68. Over the same post war period the median for the domestic and the adjusted world

    price of crude oil was $19.60 in 2008 prices. That means that only fifty percent of the time

    from 1947 to 2008 have oil prices exceeded $19.60 per barrel. (See note in box on right.)

    Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude,

    oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East.

    With limited spare production capacity, OPEC abandoned its price band in 2005 and was

    powerless to stem the surge in oil prices, which was reminiscent of the late 1970s.

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    Crude Oil Prices 1947 - August, 2009

    World Price - The only very long term price series that exists is the U.S. average wellhead or

    first purchase price of crude. When discussing long-term price behavior this presents a

    problem since the U.S. imposed price controls on domestic production from late 1973 toJanuary 1981. In order to present a consistent series and also reflect the difference between

    international prices and U.S. prices we created a world oil price series that was consistent

    with the U.S. wellhead price adjusting the wellhead price by adding the difference between

    the refiners acquisition price of imported crude and the refiners average acquisition price of

    domestic crude.The very long-term view is much the same. Since 1869, US crude oil prices adjusted for

    inflation have averaged $22.52 per barrel in 2008 dollars compared to $23.42 for world oil


    Fifty percent of the time prices U.S. and world prices were below the median oil price of

    $16.71 per barrel. If long-term history is a guide, those in the upstream segment of the crude

    oil industry should structure their business to be able to operate with a profit, below $17.65

    per barrel half of the time. The very long-term data and the post World War II data suggest a

    "normal" price far below the current price.
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    The results are dramatically different if only post-1970 data are used. In that case, U.S.

    crude oil prices average $32.36 per barrel and the more relevant world oil price averages

    $35.50 per barrel. The median oil price for that period is $30.04 per barrel.

    If oil prices revert to the mean this period is likely the most appropriate for today's analyst. It

    follows the peak in U.S. oil production eliminating the effects of the Texas Railroad

    Commission and is a period when the Seven Sisters were no longer able to dominate oil

    production and prices. It is an era of far more influence by OPEC oil producers than they had

    in the past. As we will see in the details below influence over oil prices is not equivalent to


    Established in 1960 OPEC, with five founding members Iran, Iraq, Kuwait, Saudi Arabia andVenezuela, took over a decade to establish its influence in the world market. Two of the

    representatives at the initial meetings had studied the the Texas Railroad Commission's

    methods of influencing price through limitations on production. By the end of 1971, six other

    nations had joined the group: Qatar, Indonesia, Libya, United Arab Emirates, Algeria and

    Nigeria. From the foundation of the Organization of Petroleum Exporting Countries through

    1972 member countries experienced steady decline in the purchasing power of a barrel of oil.

    Throughout the post war period exporting countries found increasing demand for their crude

    oil but a 40% decline in the purchasing power of a barrel of oil. In March 1971, the balance

    of power shifted. That month the Texas Railroad Commission set proration at 100 percent

    for the first time. This meant that Texas producers were no longer limited in the volume of

    oil that they could produce. More importantly, it meant that the power to control crude oil

    prices shifted from the United States (Texas, Oklahoma and Louisiana) to OPEC. Another

    way to say it is that there was no more spare capacity in the U.S. and therefore no tool to putan upper limit on prices. A little over two years later OPEC, through the unintended

    consequence of war, obtained a glimpse of the extent of its power to influence prices.

    Middle East Supply Interruptions

    Yom Kippur War - Arab Oil Embargo

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    In 1972, the price of crude oil was about $3.00 per barrel. By the end of 1974, the price of oil

    had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by

    Syria and Egypt on October 5, 1973. The United States and many countries in the western

    world showed support for Israel. Because of this support, several Arab exporting nations and

    Iran imposed an embargo on the countries supporting Israel. While these nations curtailed

    production by 5 million barrels per day other countries were able to increase production by a

    million barrels. The net loss of 4 million barrels per day extended through March of 1974 and

    represented 7 percent of the free world production.

    Any doubt the ability to control crude oil prices had passed from the United States to OPEC

    was removed during the Arab Oil Embargo. The extreme sensitivity of prices to supply

    shortages became all too apparent when prices increased 400 percent in six short months.

    From 1974 to 1978, the world crude oil price was relatively flat ranging from $12.21 per

    barrel to $13.55 per barrel. When adjusted for inflation world oil prices were in a period of

    moderate decline.

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    OPEC Oil Production 1973-2009

    Crises in Iran and Iraq

    The Iranian revolution was the proximate cause of what would become the highest price in

    post-WWII history. However, its impact on prices would have been limited and of relatively

    short duration had it not been for subsequent events. Shortly after the revolution, production

    was up to 4 million barrels per day.

    In September 1980, Iran already weakened by the revolution was invaded by Iraq. By

    November, the combined production of both countries was only a million barrels per day and

    6.5 million barrels per day less than a year before. Consequently worldwide crude oil

    production was 10 percent lower than in 1979. The combination of the Iranian revolution and

    the Iraq-Iran War cause crude oil prices to more than double increasing from $14 in 1978 to

    $35 per barrel in 1981. Three decades later Iran's production is only two-thirds of the level

    reached under the government of Reza Pahlavi, the former Shah of Iran. Iraq's production

    remains a million barrels below its peak before the Iraq-Iran War.

    US Oil Price Controls

    The rapid increase in crude prices from 1973 to 1981 would have been much less were it not

    for United States energy policy during the post Embargo period. The US imposed price

    controls on domestically produced oil. The obvious result of the price controls was that U.S.consumers of crude oil paid about 50 percent more for imports than domestic production and
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    U.S producers received less than world market price. In effect, the domestic petroleum

    industry was subsidizing the U.S. consumer.

    In the absence of price controls, U.S. exploration and production would certainly have been

    significantly greater. Higher petroleum prices faced by consumers would have resulted in

    lower rates of consumption: automobiles would have achieved higher miles per gallon

    sooner, homes and commercial buildings would have has better insulated and improvements

    in industrial energy efficiency would have been greater than they were during this period.

    Consequently, the United States would have been less dependent on imports in 1979-1980

    and the price increase in response to Iranian and Iraqi supply interruptions would have been

    significantly less.

    OPEC Fails to Control Crude Oil Prices

    OPEC has seldom been effective at controlling prices. While often referred to as a cartel,

    OPEC does not satisfy the definition. One of the primary requirements is a mechanism to

    enforce member quotas. The old joke went something like this. What is the difference

    between OPEC and the Texas Railroad Commission? OPEC doesn't have any Texas Rangers!

    The only enforcement mechanism that has ever existed in OPEC was Saudi spare capacity.


    With enough spare capacity at times to be able to increase production sufficiently to offset

    the impact of lower prices on its own revenue, Saudi Arabia could enforce discipline by

    threatening to increase production enough to crash prices. In reality even this was not an

    OPEC enforcement mechanism unless OPEC's goals coincided with those of Saudi Arabia.

    During the 1979-1980 period of rapidly increasing prices, Saudi Arabia's oil minister Ahmed

    Yamani repeatedly warned other members of OPEC that high prices would lead to areduction in demand. His warnings fell on deaf ears. Surging prices caused several reactions

    among consumers: better insulation in new homes, increased insulation in many older homes,

    more energy efficiency in industrial processes, and automobiles with higher efficiency. These

    factors along with a global recession caused a reduction in demand which led to falling crude

    prices. Unfortunately for OPEC only the global recession was temporary. Nobody rushed to

    remove insulation from their homes or to replace energy efficient plants and equipment --

    much of the reaction to the oil price increase of the end of the decade was permanent andwould never respond to lower prices with increased consumption of oil.

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    OPEC Production & Crude Oil Prices

    OPEC continued to have mixed success in controlling prices. There were mistakes in timing

    of quota changes as well as the usual problems in maintaining production discipline among

    its member countries.
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    The price increases came to a rapid end in 1997 and 1998 when the impact of the economic

    crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997

    OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD

    effective January 1, 1998. The rapid growth in Asian economies had come to a halt. In 1998

    Asian Pacific oil consumption declined for the first time since 1982. The combination of

    lower consumption and higher OPEC production sent prices into a downward spiral. In

    response, OPEC cut quotas by 1.25 million b/d in April and another 1.335 million in July.

    Price continued down through December 1998.

    Prices began to recover in early 1999 and OPEC reduced production another 1.719 million

    barrels in April. As usual not all of the quotas were observed but between early 1998 and the

    middle of 1999 OPEC production dropped by about 3 million barrels per day and was

    sufficient to move prices above $25 per barrel.

    With minimal Y2K problems and growing US and world economies the price continued to

    rise throughout 2000 to a post 1981 high. Between April and October, 2000 three successive

    OPEC quota increases totaling 3.2 million barrels per day were not able to stem the price


    In the wake of the attack crude oil prices plummeted. Spot prices for the U.S. benchmark

    West Texas Intermediate were down 35 percent by the middle of November. Under normal

    circumstances a drop in price of this magnitude would have resulted an another round of

    quota reductions but given the political climate OPEC delayed additional cuts until January

    2002. It then reduced its quota by 1.5 million barrels per day and was joined by several non-

    OPEC producers including Russia who promised combined production cuts of an additional

    462,500 barrels. This had the desired effect with oil prices moving into the $25 range by

    March, 2002. By mid-year the non-OPEC members were restoring their production cuts but

    prices continued to rise and U.S. inventories reached a 20-year low later in the year.

    By year end oversupply was not a problem. Problems in Venezuela led to a strike at PDVSA

    causing Venezuelan production to plummet. In the wake of the strike Venezuela was never

    able to restore capacity to its previous level and is still about 900,000 barrels per day below

    its peak capacity of 3.5 million barrels per day. OPEC increased quotas by 2.8 million

    barrels per day in January and February, 2003.

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    The loss of production capacity in Iraq and Venezuela combined with increased OPEC

    production to meet growing international demand led to the erosion of excess oil production

    capacity. In mid 2002, there was over 6 million barrels per day of excess production capacity

    and by mid-2003 the excess was below 2 million. During much of 2004 and 2005 the spare

    capacity to produce oil was under a million barrels per day. A million barrels per day is not

    enough spare capacity to cover an interruption of supply from most OPEC producers.

    In a world that consumes over 80 million barrels per day of petroleum products that added a

    significant risk premium to crude oil price and is largely responsible for prices in excess of

    $40-$50 per barrel.

    Other major factors contributing to the current level of prices include a weak dollar and thecontinued rapid growth in Asian economies and their petroleum consumption. The 2005

    hurricanes and U.S. refinery problems associated with the conversion from MTBE as an

    additive to ethanol have contributed to higher prices.

    World Events and Crude Oil Prices 2001-2007

    CRUDE OIL IN 2011:

    U.S. crude oil was on a average cost $79.83 a barrel in 2010, up from the previous outlook

    for $78.67 a barrel. Prices are seen increasing from an average $77 a barrel in the first quarter

    of 2010 to $85 a barrel by the fourth quarter of 2011. In 2011, prices will average $83.50 a

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    Prices are expected to rise as "the world oil market had gradually tighten in 2010 and 2011,

    provided the global economic recovery continues as projected. Economic growth in

    developed economies that make up the Organization for Economic Cooperation and

    Development should increase from 1.2% in 2010 to 2.7% in 2011. Commodities in general

    have rewarded investors with huge, in some cases, historic, returns in 2010, primarily in

    anticipation of an ever-strengthening global economic recovery and low interest rates in the

    U.S. However, one of the premier commodities, crude oil, has lagged, trading range-bound

    with great volatility, unable to crack the $90 per barrel level (for most of the year). Due to

    this high reward in commodities investors could able to get greater reward in relevant sector

    stock prices as crude oil prices increases there is better result on companys profit and it

    would increase its stock price.

    Prices were largely unaffected by some significant events, including the Gulf oil spill and the

    debt crisis in the euro zone. After plunging from all-time highs of about $148 in the summer

    of 2008 to a bottom in early 2009 (coincident with the expansion of the global financial

    meltdown), oil prices have struggled mightily to claw back.

    Now, as 2011 dawns, oil might be turning the corner. Indeed, crude oil recently touched

    $126, a 26-month high.

    Indeed, after growing by an estimated 5 percent in 2010, global GDP is expected to expand

    by 4.2 percent next year; once again, with almost three-quarters of that growth coming from

    commodity-hungry emerging markets. China and India are anticipated to witness 9 percent

    and 8.7 percent economic expansion next year, respectively .There may be zigzags in the

    future according to the economy, this and that, but the general trend is we will see higher oil

    prices. This would help the companies in changing their profit and it would furthermore help

    the companies in determining their profit strategies and it would vary in different group of

    petroleum companies. There will be differences in relationship between crude oil price and

    exploring, refining or marketing companies since the profit for these 3 inner sector would

    differ since their profit would vary due to their income and expense change in different ways.

    Francisco Blanch, head of commodities at Bank of America /Merrill Lynch , told Bloomberg

    News that "global oil demand is set to hit a new record in 2011. The underlying economic

    picture is still positive. We are still looking for economic growth because of quantitative

    easing and accelerating growth in [the] emerging markets." This basically leads for better
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    emphasis on stock investors that there would be greater increase in the year 2011 and

    investors can aim at getting higher profits in exploring companies since it would help the

    companies to sell the crude oil at higher price.

    The key is a restoration in global demand. Indeed, oil demand climbed 3.7 percent in

    the first quarter of 2011. The IEA predicts that global energy demand will climb to 88.2

    million barrels per day (bpd) in 2011, up from 86.9 million bpd last year. Moreover, the IEA

    noted that global oil demand will grow by an average of 1.4-million bpd annually between

    2009 - 2015.

    "The country's growing need to import fossil fuels to meet its rising domestic demand will

    have an increasingly large impact on international markets." These statements undoubtedlyclarifies that oil demand is increasing at higher level and there is so much need of oil in

    coming years that too till 2015 we can clearly see a oil demand of 4 to 5% increase per

    annum, thus it naturally would end up around $ 180 per barrel which would clearly states that

    companies with oil related companies profit would generally increases year by year around

    15-20% and it would provide shareholders with more EPS and naturally it would finally

    prevail in an increase of share price.

    The eternal irony is that if energy prices rise "too high" it would sap demand, which would

    then start declining again. Related to this issue, oil companies will not justify expanding

    production unless oil prices persist at high levels, perhaps north of $100. The other side of the

    oil price equation -- supply -- is likely to tighten. OPEC, which controls 40 percent of the

    planet's crude production, will surely seek to control output in order to push prices higher.

    "Oil prices increasing to $100 [per barrel] would not hurt the global economy," said

    Mohammad Ali Khatibi, Iran's OPEC representative, in February. "Not only producers, butconsumers have reached this agreement that $70 to $90 is a suitable price for oil because it

    encourages investment and does not hurt the global economy." If oil prices surges above

    $100 a barrel it would make investors to tremble in which company stocks to focus upon and

    to invest thus they would finally settle in increased profitability and income for investors.

    The Fed also plays a key role in oil's fortunes, since crude is priced in dollars. Oil prices

    have climbed more than 7 percent since early November when the central bank announced it

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    will purchase an additional $600 billion of U.S. Treasuries. Given Ben Bernanke's

    commitment to increasing liquidity even more, the price of oil is likely to keep rising.

    The price crash in 2008 compelled major oil companies to drastically cut their capital

    investments. "Integrated oil companies such as IOC, BPCL, Reliance Industries had

    collectively reduced capital spending by about 20 percent in 2009", reliance industries KG

    basin dispute had lead to change in share price of that company for few months.

    "This will negatively impact the project pipeline in 2012 and 2013. Thus, if demand stays on

    its current trajectory, there will be need of more oil by then; and unfortunately there may not

    have enough. If supply is in question, it is possible that prices will need to rise high enough to

    knock out demand." While crude oil has at least remained "above water" during in 2011, aclosely-associated commodity, natural gas, plunged more than 30 percent in price this year,

    making it among the worst-performing commodity assets. Natural gas supply has surged,

    while consumption has remained anemic. The market for global natural gas is really quite

    distinct from the US natural gas market.

    The global market is largely defined by liquefied natural gas (LNG), which trades more

    closely, or even at parity, with oil prices. This is the perfect recipe for an environment of low

    prices that have very little connection to global oil prices. Indian oil corporation and Bharat

    petroleum which involves more in natural gas is struggling hard to increase their sales

    concentration on more areas.

    Over the next five years, the combination of low prices and highly visible supplies will lead

    to the development of new markets. First, utilities will become increasingly more confident in

    the visibility and reliability of supply, and that should lead to an expanded use of natural-gas

    powered generation for electricity. Secondly, I think that we will see a robust market begin todevelop for compressed natural gas as a transportation fuel. It is still very early, but the

    writing is on the wall. It simply makes too much economic sense. This would naturally

    increase the need for natural gas in coming years and it would help in monitoring the growth

    of this sector aand it would simply helps in better growth and profit for the companies.

    Lastly, due to new air and emissions standards expected to be handed down from the

    Environmental Protection Agency (EPA), we expects that by 2014 we should begin to see a

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    wave of coal-fired plant retirements. In order to replace this lost capacity, utilities will need

    to turn increasingly to natural gas

    So while demand should increase over the next two to three years, the elevated level of

    supply should keep prices in their current range. If prices do rise over $5.00 to $5.50 per

    thousand cubic feet (mcf), exploration & production companies will simply sell forward their

    future production, attempting to lock in those prices. These exploration and production would

    settle in increased profits and thus they would bring in increase of income over their

    expenses. There may be slight variation in target of profit but predominantly they would help

    in making more profits thus trying to increase their PAT and bring in increase of EPS and PE

    ratio so that stock prices would naturally increase and helps

    Companies are not hedged well for 2011 and 2012, so anytime gas prices rise into this range,

    we should see a lot of supply come onto the market from the natural gas futures market. As

    such, prices will range between $5.00 and $5.50 per mcf over the next two or three years.


    Multi Commodity Exchange of

    India Ltd.Expiry





    Date bpcl


    e ioc(MMM

    YYYY) (Rs.) date







    JAN 2006 2,830.00






    5 713.9 510.7FEB

    2006 2,603.00




    06 435.5 708.85



    2006 2,775.00




    06 425.3 795.35 584.4APR

    2006 3,121.00






    5 997.95



    2006 3,158.00






    5 954.95



    2006 3,215.00




    06 334.5




    5JUL 2006 3,596.00 14/07/20 3-Jul- 312.4 978.8 389.3

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    06 06 5 5AUG

    2006 3,405.00











    2006 2,922.00




    06 366.3


    75 522.5OCT

    2006 2,681.00




    06 400.9





    2006 2,665.00




    06 344.3


    45 441.7DEC

    2006 2,807.00








    15 450.1

    JAN 2007 2,339.00




    07 360.4


    45 495.6FEB

    2007 2,520.00








    50 413.3MAR

    2007 2,567.00











    2007 2,721.00











    2007 2,572.00




    07 361.2


    80 466.2JUN

    2007 2,790.00








    55 443.6

    JUL 2007 2,992.00




    07 321.3





    2007 2,945.00




    07 311


    00 389SEP

    2007 3,200.00




    07 362


    00 471OCT

    2007 3,386.00




    07 345.9


    00 480NOV

    2007 3,670.00




    07 389


    00 540.5DEC

    2007 3,591.00




    07 518


    50 793

    JAN 2008 3,609.00




    08 357


    00 475FEB

    2008 3,788.00











    2008 4,458.00




    08 404


    70 447.1

    APR2008 4,547.00


    1-Apr-08 409

    2,608.00 459.8

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    2008 5,263.00




    08 362


    10 430JUN

    2008 5,781.00




    08 221.2


    00 331

    JUL 2008 5,989.0015/07/2008

    1-Jul-08 326

    2,214.00 404


    2008 4,925.00




    08 302


    30 403SEP

    2008 4,397.00








    10 408OCT

    2008 3,610.00




    08 286


    00 336NOV

    2008 2,821.00




    08 363


    00 416DEC

    2008 2,134.00




    08 377


    55 427

    JAN 2009 1,737.00




    09 392


    80 446FEB

    2009 1,827.00




    09 391





    2009 2,390.00








    10 386.1APR

    2009 2,457.00




    09 386


    20 440MAY

    2009 2,792.00




    09 465





    2009 3,386.00








    00 530.1

    JUL 2009 2,998.00




    09 474


    00 547.2AUG

    2009 3,259.00




    09 509


    70 581.9SEP

    2009 3,359.00




    09 579


    00 680.2OCT

    2009 3,644.00




    09 509


    00 309.5NOV

    2009 3,595.00




    09 595.1


    00 289.5DEC

    2009 3,437.00




    09 635.5


    35 306.9

    JAN 2010 3,605.00




    10 603.2


    90 316.3FEB 3,709.00 19/02/20 3-Feb- 559.8 979.3 316

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    2010 10 10 5MAR

    2010 3,669.00




    10 517


    50 296APR

    2010 3,633.00




    10 520


    55 296.6MAY

    2010 3,214.00








    50 354.1JUN

    2010 3,552.00




    10 662.4





    JUL 2010 3,604.00




    10 640





    2010 3,471.00




    10 764.5 915.9 410.3SEP

    2010 3,414.00






    5 987.3 417OCT

    2010 3,534.00




    10 728.9


    15 413NOV

    2010 3,720.00






    5 986.4 347.1DEC

    2010 3,995.00




    10 657


    00 343.4

    JAN 2011 4,123.00




    11 608.6 919.8 335.5FEB

    2011 3,895.00




    11 557 961.7 300MAR

    2011 4,731.00




    11 583.4 983



    2011 4,806.00



    2011 4,858.00



    2011 4,893.00



    JUL 2011 4,950.00



    2011 4,996.00



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    Yearly Results of



    ------------------- in Rs. Cr. -------------------

    Mar '07 Mar '08 Mar '09 Mar '10 Mar '11

    Sales Turnover105,363.0










    Other Income 193.00 895.00 2,060.00 2,460.00 3,052.00

    Total Income105,556.0










    Total Expenses 87,153.00110,137.0








    Operating Profit 18,210.0023,306.0023,683.0030,581.0038,126.00

    Profit On Sale Of Assets -- -- -- -- --

    Profit On Sale Of

    Investments -- -- -- -- --

    Gain/Loss On Foreign

    Exchange-- -- -- -- --

    VRS Adjustment -- -- -- -- --

    Other Extraordinary

    Income/Expenses-- -- -- -- --

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  • 8/6/2019 Arjun Report


    According to Mukesh Ambani, the company will augment its commitment to the Indian

    market by investing in new petrochemical capacity, oranised retailing and digital services.

    We will augment our commitment to Indian markets by investing in new petrochemical

    capacity, organized retailing and digital services, . The company's new projects represented

    the largest-ever investment by Reliance in a sector and the biggest capital commitment in the

    global petrochemicals segment as well.

    For 2010-11 , RIL recorded a turnover of over R258,000 crore ($58 billion) and a net profit

    of R20,286 crore ($ 4.5 billion) with record income from each of its current three core

    segments of petrochemicals, refining and marketing and oil and gas.

    Outlining the companys future strategy for growth, Ambani remarked, RIL gearing up for the next phase of growth through a combination of our own initiatives and forging new

    partnerships with leading companiesDuring the 2010-11 fiscal, Reliance entered into three

    partnerships on shale gas in North Amercia. The joint ventures are expected to accrue

    resources in excess of 10 trillion cubic feet and make a meaningful contribution to companys

    earnings within the next few years. On the company selling 30% of its stake in 23 oil and gas

    exploration blocks, including the all-important eastern offshore KG-D6 fields, to UKs BP,

    Reliance has seen output from the KG-D6 fields drop to less than 50 million standard cubic

    metres per day from 61.5 mmscmd in March 2010, due to reservoir complexities. It is now

    banking on BP to salvage the situation.

    Reliance industries aim at increasing their revenue is fully supported by their KG-D6 basin

    and their newly signed agreement with BP of UK. This would inevitably helps the company

    to increase their net profit year on year and all three core sectors are increasing in a faster

    phase so that RIL could able to increase their overall sales revenue from exploring, refining

    and marketing segments and this is increasing the companys revenue, on the other hand

    company also trying to decrease their expense and one such way they recently took is

    withholding the increase in salary and so that there wont be any increase of expense burden.

    Reliance industries stock has been rated neutral by Goldman Sachs this would make stock to

    move in a down trend but if we take the companys performance in the coming years we

    could see a better growth since it has got its own exploring plants in Krishna Godavari basin

    and crude oil price would touches $150 in a year or two so there would be more revenue

    coming on the part of reliance industries and this would make companys profit to increase

  • 8/6/2019 Arjun Report


    around twenty percent every year. So RIL stocks can expect to reach a level of around

    Rs.1400 from its current level of Rs.950-1000 in a time span of two years.


    Balance Sheet of

    Indian Oil


    ------------------- in Rs. Cr. -------------------

    Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

    12 mths 12 mths 12 mths 12 mths 12 mths

    Sources Of Funds

    Total Share Capital 1,168.01 1,168.01 1,192.37 1,192.37 2,427.95

    Equity Share Capital 1,168.01 1,168.01 1,192.37 1,192.37 2,427.95

    Share Application Money 0.00 24.36 0.00 21.60 0.00

    Preference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves 28,134.6633,664.9239,893.8842,789.2948,124.88

    Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

    Networth 29,302.6734,857.2941,086.2544,003.2650,552.83

    Secured Loans 7,793.54 5,671.42 6,415.7817,565.1318,292.45

    Unsecured Loans 18,610.7721,411.27 29,107.3927,406.93 26,273.80

    Total Debt 26,404.3127,082.6935,523.1744,972.0644,566.25

    Total Liabilities 55,706.9861,939.9876,609.4288,975.3295,119.08

    Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

    12 mths 12 mths 12 mths 12 mths 12 mths

    Application Of Funds

    Gross Block 43,662.8454,770.2956,731.5062,104.6471,780.60

    Less: Accum. Depreciation 18,639.4221,400.0723,959.6827,326.1930,199.53

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    Net Block 25,023.4233,370.2232,771.8234,778.4541,581.07

    Capital Work in Progress 9,620.03 4,394.30 9,170.2218,186.0521,268.63

    Investments 14,521.3919,990.8621,535.7832,232.1322,370.25

    Inventories 24,277.7924,702.6930,941.4825,149.6036,404.08Sundry Debtors 6,699.48 6,736.06 6,819.23 5,937.86 5,799.28

    Cash and Bank Balance 729.54 916.24 815.05 796.56 916.56

    Total Current Assets 31,706.8132,354.99 38,575.7631,884.0243,119.92

    Loans and Advances 10,729.9311,601.54 14,920.9313,348.9917,453.01

    Fixed Deposits 14.63 9.73 9.38 1.46 398.55

    Total CA, Loans & Advances 42,451.3743,966.2653,506.0745,234.4760,971.48

    Deffered Credit 0.00 0.00 0.00 0.00 0.00

    Current Liabilities 28,377.3632,305.52 39,326.0738,890.28 40,818.96

    Provisions 7,589.38 7,633.41 1,172.99 2,603.4610,271.56

    Total CL & Provisions 35,966.7439,938.93 40,499.0641,493.7451,090.52

    Net Current Assets 6,484.63 4,027.3313,007.01 3,740.73 9,880.96

    Miscellaneous Expenses 57.51 157.27 124.59 37.96 18.17

    Total Assets 55,706.9861,939.9876,609.4288,975.3295,119.08

    Contingent Liabilities 8,724.7622,676.47 25,574.9626,317.3125,715.07

    Book Value (Rs) 250.88 298.22 344.58 368.86 208.21

    Based on the previous year records and forecasted future sales and expenses we could come

    to a estimation of share price of Indian Oil Corporation.






    2010A 2501 107.1 44.1 7.1 22

    2011E 2872 79 32.7 9.5 14.5

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    2012E 2400 94 39 8.0 15.5

    2013E 2300 105 43 7.2 16



    Refinery throughput stood at 13.3mmt , up 6% Year on Year and 10% when compared to

    Quarter to Quarter. Marketing volumes were 18.4mmt, up 4% Year on Year and 9% Quarter

    on Quarter. In third quarter of FY11, IOC's gross under-recovery was Rs261b, of which

    upstream shared Rs87b and the government shared Rs117b, resulting in net under-recovery

    of Rs57b. As in previous years, subsidy sharing is likely to be finalized only towards the end

    of the year (in 4Q); quarterly sharing is no indication of the final sharing formula.

    Government had announced around Rs.210b compensation for Oil Manufacturing Companies

    which would help in decreasing the revenue expenses of OMC. Oil bonds stood at Rs169b at

    the end of 3Quarter of FY11. Other income of Rs13.5b includes forex gain of Rs3b.

    Suppose OMC sharing is at 10 percent of total expense then it would automatically show a

    uptrend in expense since revenue reduces.

    FY 08 FY09 FY10 FY 11FOREX (Rs./US$) 40.3 46 47.5 45Brent(US$/bbl) 82.3 84.8 69.6 82.7Under Recovery


    Petrol 73 52 52 27Diesel 353 523 93 277

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    Kerosene 191 282 174 185LPG 156 176 143 205Total 773 1033 461 695Sharing (Rs.b)Oil bonds 353 713 260 396Upstream 257 329 145 230OMCs sharing 163 (9) 56 69Total 773 1033 461 695Sharing %Oil bonds 46 69 56 57Upstream 33 32 31 33OMCs sharing 21 (1) 12 10Total 100 100 100 100

    IOC had commenced operations at its new 0.9mmtpa cracker in May 2010, but due to

    start-up issues, the cracker is yet to reach its optimal operational levels. Due to higher

    operating cost and lower utilization levels, IOC had reported EBIT loss of Rs5.5b and loss of

    Rs15.4b. These operations may be turned profitable in the next one or two quarters so that

    companys exploration would increase and make it more profitable in the next financial year.

    The stock is trading at 8 times of financial year 2012 expected EPS of Rs38.7. There is an

    expectation that the government to spell out the sustainable subsidy sharing formula (at

    different oil prices) over the next few months. This would increase the value of IOC share



    Balance Sheet of




    ------------------- in Rs. Cr. -------------------

    Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

    12 mths 12 mths 12 mths 12 mths 12 mths

    Sources Of Funds

    Total Share Capital 300.00 361.54 361.54 361.54 361.54

    Equity Share Capital 300.00 361.54 361.54 361.54 361.54

  • 8/6/2019 Arjun Report


    Share Application Money 61.54 0.00 0.00 0.00 0.00

    Preference Share Capital 0.00 0.00 0.00 0.00 0.00

    Reserves 8,777.88 9,912.0011,315.3011,766.5712,725.17

    Revaluation Reserves 0.00 0.00 0.00 0.00 0.00Networth 9,139.4210,273.5411,676.8412,128.1113,086.71

    Secured Loans 3,071.32 2,593.96 2,7