Fundamental and technical analysis in Crude Oil and Natural

Gas

(NAME)
()

Project submitted in partial fulfillment for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

PRINCETON P.G COLLEGE

(Affiliated to Osmania University)
Hyderabad-500007

1
Fundamental and technical analysis in Crude Oil and Natural
Gas

(NAME)
(HT NO)

Project submitted in partial fulfillment for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

Internal guide: External guide:

Asst. Professor

PRINCETON P.G COLLEGE

(Affiliated to Osmania University)
Hyderabad-500007

2
 DECLARATION

I hereby declare that this project report titled “Fundamental and

technical analysis in Crude Oil and Natural Gas ” submitted by me to

the Department of PRINCETON P.G COLLEGE, is a bonafide work undertaken by me

and it is not submitted to any other University or institution for the award of any degree/

diploma/certificate of published any time before.

Name and Address of the Student Signature of the student

Date:

3
 CERTIFICATE

This is to certify that the Project Report titled “ Fundamental and

technical analysis in Crude Oil and Natural Gas ” submitted in partial

fulfillment for the award of MASTER OF BUSINESS ADMINISTRATION was carried

by under my guidance. This has not been submitted to any other University or

Institution for the award of any degree/diploma/certificate.

Name and Address of the Supervisor Signature of the Supervisor

Date:

4
 ACKNOWLEDGEMENT

I convey my heartful thanks to every one who helped me directly

and indirectly in completing my project successfully.

I convey my heartful thanks to Mrs. for guiding me in

successful completion of my project.

I would like to thank Mrs ,Head of the

Department, Business management and all the faculty members, Princeton
P.G College for their valuable guidance throughout the completion of my
project.

I convey my heartful thanks to , FCH for giving me an

opportunity to undertake the project. I also thank ,FCH and the entire staff
for guiding me and extending their support in completion of my project.

I am indebted to my family members and friends for their moral

support in completing my project work.

()

5
 ABSTRACT

India has a long history of commodity futures trading, extending over 125

years. Commodity includes all kinds of goods. FCRA defines “goods” as “every kind of

movable property other than actionable claims, money and securities”. Futures’ trading is

organized in such goods or commodities as are permitted by the Central Government.

A futures contract is a type of “forward contract”. FCRA defines forward

contract as “a contract for the delivery of goods and whish is not a ready delivery contract”.

In India, the Commodity Futures Trading is gaining importance in the

market. To study how the Crude oil Natural gas are trading in MCX and NCDEX. Industry

and Economic Analysis of both the products. Technical analysis for both the products using

Moving averages, Resistance and Support, MACD (Moving Average and Converse

Diversion), RSI (Relative Strength Index). The data collected only on commodity

derivatives but not on the financial derivatives.

The share of GDP of crude oil was only 28.7 % while 71.3 %

were imports. And the total crude oil production in 2003-04 was 33 million tons, while

imports were as high as 90 million tons. The share of natural gas in India’s energy mix has

increased from 2.5 % in 1980s to more than 7 % now. The demand for natural gas in India

is 1.5 times the current levels of domestic production. Demand for gas is expected to rise at

CAGR of more than 5 % during 2000 to 2025.

Technical analysis is explained by using Moving averages,

Resistance and Support, MACD (Moving Average and Converse Diversion), RSI (Relative

Strength Index). In both the graphs crude oil and natural gas, Moving averages is plotted by

taking 9-day (black) and 18-day (pink). If 18-day is crossing the 9-day, it is indicated that

6
market is falling down. If 9-day is crossing the 18-day, it is indicated that market is moving

upwards. .

Resistance is equivalent to “supply line”, and support is

equivalent to “demand line”. In the above chart we observe that, the above line shows

Resistance and below line shows Support. Here, both the 18-day and 9-day are

crossing the resistance, so resistance becomes support. In crude oil, the Resistance line is

above the point 3000 and Support line is near to the point 2750, where as in natural gas, the

Resistance line is at the point 345 and Support line is at the point 312, so we say that it

shows a good Resistance and Support lines.

MACD is done by taking the Difference between the 12-day & 26-day

EMAs. A 9-day EMAs, called the “signal” (or trigger”) line is plotted on top of the MACD

to show buy/sell opportunities. MACD is indicated by red line and 9-day or signal line is

indicated by black line. If MACD is above its signal line, so it shows buy signal. Later, if

MACD is below its signal line, it shows a sell signal.

The RSI is a popular oscillator. It usually tells about the Overbought

and Oversold. If RSI is above 70, it is considered as Overbought. If RSI is below 30, it is

considered as Oversold.

So, I would like to conclude that, we can’t expect how the prices are

fluctuating in futures market. I found that there are only futures contracts to the commodity

markets. I would like to suggest that it will be better if Options contract are included.

7
 TABLE OF CONTENTS
CONTENTS PAGE NO
List of Tables A
List of Charts B
1. INTRODUCTION 11
[Link] AND SCOPE OF THE STUDY
[Link] AND METHODOLOGY
4. REVIEW OF LITERATURE 16
5. COMPANY PROFILE 45
6. DATA ANALYSIS AND INTERPRETATION OF ENERGY 70
COMMODITIES
6.1 FUNDAMENTAL ANALYSIS OF Crude Oil 78
6.2 TECHNICAL ANALYSIS OF Crude Oil 97
6.3 FUNDAMENTAL ANALYSIS OF NATURAL GAS 107

6.4 TECHNICAL ANALYSIS OF NATURAL GAS 125

[Link] AND SUGGESTIONS
8. CONCLUSIONS 130
9. BIBLIOGRAPHY 132

8
 (A)

LIST OF TABLE
CONTENTS PAGE NO
List of Exchanges for different products 26
Commodity Exchange registered in India 27
Oil Intensity in Major Countries based on GDP 92
Impact of increase in Oil prices on growth and inflation levels in India 95
Future Contract specification of Crude oil 100
Future Contract specification of Natural Gas 128

9
 (B)

LIST OF CHARTS
CONTENTS PAGE NO
a) Crude Oil Prices (1969 - 2009) 79
b) U.S and WORLD Events and Oil Prices 80
c) WORLD Events and Oil Prices 82
d) Increase in Energy Demand 87
e) World Oil Production 88
f) Technical Analysis of Crude Oil 97
g) Distribution of proved reserves in 1985 (NG) 112
h) Distribution of proved reserves in 1995 and 2005 (NG) 113
i) Share of Natural gas as primary source 114
j) Demand and Supply Scenario 115
k) Domestic scenario 118
l) Share of Natural Gas 118
m) Domestic Natural Gas Production 121
n) Technical Analysis of Natural Gas 125

10
 CHAPTER-1

INTRODUCTION

INTRODUCTION

HISTORY OF COMMODITY TRADING:

In the 1840s, Chicago had become a commercial center with railroad and telegraph lines

connecting it with the East. Around this same time, the McCormick reaper was invented

which eventually lead to higher wheat production. Midwest farmers came to Chicago to sell

their wheat to dealers who, in turn, shipped it all over the country.

11
He brought his wheat to Chicago hoping to sell it at a good price. The city had few storage

facilities and no established procedures either for weighing the grain or for grading it. In

short, the farmer was often at the mercy of the dealer.

1848 saw the opening of a central place where farmers and dealers could meet to deal in

“spot” grain – that is, to exchange cash for immediate delivery of wheat.

The futures contract, as we know it today, evolved as farmers (sellers) and dealers (buyers)

began to commit to futures exchanges of grain for cash. For instance, the farmer would

agree with the dealer on a price to deliver to him 5,000 bushels of wheat at the end of June.

The bargain suited both parties. The farmer knew how much he would be paid for his

wheat, and the dealer knew his costs in advance. The two parties may have exchanged a

written contract to this effect and even a small amount of money representing a

“guarantee”.

Such contracts became common and were even used as collateral for bank loans. They also

began to change hands before the delivery date. If the dealer decided he didn’t want the

wheat, he would sell the contract to someone who did. Or, the farmer who didn’t want to

deliver his wheat might pass his obligation on to another farmer. The price would go up

and down depending on what was happening in the wheat market. If bad weather had

come, the people who had contracted to sell wheat would hold more valuable contracts

because the supply would be lower; if the harvest were bigger than expected, the seller’s

contract would become less valuable. It wasn’t long before people who had no intention of

ever buying or selling wheat began trading the contracts. They were speculators, hoping to

buy low and sell high and buy low.

12
 NEED FOR THE STUDY

1. The Commodity Futures Trading is gaining immense importance in Secondary

market Investments.

2. while Crude Oil and Natural Gas are backbone of any economy in the world and

their trading and price fluctuations show retro- spective effect .

3. As such, commodity trading on these products has been gaining importance in the

market.

CHAPTER-2

13
 OBJECTIVES AND
SCOPE

OBJECTIVES OF THE STUDY

1. Commodity trading at MCX and NCDEX in crude oil and Natural gas

2. To study the industry and economic analysis of both the products

3. Technical analysis of the products in commodity Future study of crude oil and

Natural Gas using five statistical methods with special reference to moving

averages method , RSI (Relative Strength Index), MACD (moving average

convergence divergence),Resistance and Support.

14
4. To study the fluctuations in commodity Futures markets using 4 technical methods.

SCOPE AND LIMITATIONS OF THE STUDY

1. Commodity trading at MCX on crude oil and natural gas

2. Commodity trading only for a period.

3. Technical analysis using to moving averages method, RSI (Relative Strength

Index), MACD (moving average convergence divergence), Resistance and Support.

4. The data collected only on commodity derivatives but not on the financial

derivatives.

5. The commodities covered under this project are limited to two; they are crude oil

and Natural gas.

6. In analysis we can say that, in coming 3 days we can’t expect how the prices are

fluctuating in the Futures market.

15
 CHAPTER-3

RESEARCH AND
METHODOLOGY

METHODOLOGY OF THE STUDY

RESEARCH OF THE STUDY

 TYPE OF RESEARCH
The research is basically a descriptive research. In this project Descriptive research
methodologies i s u s e d . The research methodology will be used for gathering
details of different aspects of CRUDEOIL AND NATURAL GAS ANALYSIS

 SOURCE OF DATA COLLECTION

Secondary data will be collected from articles in journals and magazines. The
database of MCX, NCDEX ,OPEC and NYMEX will be taken. As this topic is very new,

16
 article from other w e b s i t e l i n k s i s r e q u i r e d . Report submitted b y MCX/FMC
committee is used.

METHODOLOGY OF THE STUDY

Data collection instrument:

Secondary Data:

The data that is used in this project is also in the form of secondary
nature. The data is collected from secondary sources such as various websites,
journals, newspapers, books, etc. the analysis used in this project has been done
using selective technical tools. In Equity market, risk is analyzed and trading
decisions are taken on basis of technical analysis. It is collecting share prices of
selected companies for a period of five years.

TOOLS USED:

1. Win quote is using for charts building

2. Ms –excel is using for demand and supply graphs.

CHAPTER-4

REVIEW
17
 OF
LITERATURE

LITERATURE REVIEW

COMMODITY FUTURES MARKET:

18
India has a long history of commodity futures trading, extending over 125 years. Still, such

trading was interrupted suddenly since the mid seventies in the fond hope of ushering in an

elusive socialistic pattern of society. As the country embarked on economic liberalization

policies and signed the GATT agreement in the early nineties, the government realized the

need for future trading to strengthen the competitiveness of Indian agriculture and the

commodity trade and industry. Futures trading began to be permitted in several

commodities, and the ushering in of the 21-century saw the emergence of new National

Commodity Exchange with country wide reach for trading in almost all primary

commodities and their products.

A commodity futures contract is essentially a financial instrument. Following the absence

of futures trading in commodities for nearly four decades, the new generation of

commodity producers, processors, market functionaries, financial organizations, broking

agencies and investors at large are, unfortunately, unaware at present of the economic

utility, the operational techniques and the financial advantage of such trading.

The futures markets are described as continuous auction markets and exchanges providing

the latest information about supply and demand with respect to individual commodities,

financial instruments, and currencies. Futures exchanges are where buyers and sellers of an

expanding list of commodities, financial instruments, and currencies, come together to

trade. Trading has also been initiated in options on futures contracts. Thus, option buyers

participate in futures markets with different risk. The exact risk is known to the option

buyer. It is unknown to the futures trader.

19
 STATURORY FRAME WORK FOR REGULATING COMMODITY FUTURES

EXISTS IN INDIA:

Commodity futures contracts and the commodity exchanges organizing trading in such

contracts are regulated by the government of India under the Forward Contracts

(Regulation) Act, 1952(FCRA or the Act),and the rules framed their under. The nodal

agency for such regulation is the Forward Markets Commission (FMC), situated at

Mumbai, which functions under the aegis of the Ministry of the Consumer Affairs, Food

and Public Distribution of the Central Government..

WHAT IS COMMODITY?

Commodity includes all kinds of goods. FCRA defines “goods” as “every kind of movable

property other than actionable claims, money and securities”. Futures’ trading is organized

in such goods or commodities as are permitted by the Central Government. At present, all

goods and products of agricultural (including plantation), mineral and fossil origin are

allowed for futures trading under the auspices of the commodity exchanges recognized

under the FCRA. The National Commodity Exchanges have been recognized by the

Central Government for organizing trading in all permissible commodities which include

precious (gold & silver) and nonferrous metals; cereals and pulses; ginned and unginned

20
cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and

onions; coffee and tea; rubber and spices, etc.

WHAT IS COMMODITY EXCHANGE?

A commodity exchange is an association, or a company or any other body corporate

organizing futures trading in commodities.

The National commodity & Derivatives Exchange of India Limited (NCDEX) and Multi

Commodity Exchange of India (MCX0 the premier exchanges of India have become

operational from December 15th of 2003 in national level.

HOW FUTURES MARKETS CAME ABOUT:

Many people see pictures of the large crowd of traders standing in a crowd yelling and

signaling with their hands, holding pieces of paper, and writing frantically. To the outsider,

it looks like chaos. But do you really think that there is in fact chaos going on in the

world’s futures pits? Not a chance. Actually, everyone in the crowd knows exactly what’s

going on.

How does this differ from the way thinks operated in the ‘old days’? Before there were

organized grain and commodity markets, farmers would bring their harvested crops to

major population centers. There they would search for buyers. There were no storage

facilities; and many times the harvest would rot before buyers were found. Also, because

21
many farmers would bring their crops to market at the same time, the price of the crops or

commodities would be driven down. There was tremendous supply in relation to demand.

The reverse was true in the spring. Many times there would be a shortage of crops and

commodities and the price would rise sharply.

Initially, the first organized and central market places were created to provided spot prices

for immediate delivery. Shortly thereafter, forward contracts were also established. These

‘forwards’ were forerunners to the present day futures contract.

Futures prices and the bid and asked price are continuously transmitted throughout the

world electronically. Regardless of what geographic location the speculator or hedger is

located in, he has the same access to price information as everyone else. Farmers, bankers

manufactures, corporations, all have equal access. All they have to do is call their broker

and arrange for the purchase or sale of a futures contract. The person who takes the

opposite side of your trade may be a competitor who has a different outlook on the future

price, it may be a floor broker, or it could be a speculator.

MEANING OF FUTURES CONTRACT:

A futures contract is a type of “forward contract”. FCRA defines forward contract as “a

contract for the delivery of goods and whish is not a ready delivery contract”. Under the

22
Act, a ready delivery contracts is one, which provides for the delivery of goods and the

payments of price therefore, either immediately or within such period not exceeding 11

days after the date of the contract, subject to such conditions as may be prescribed by the

Central Government. A ready delivery contract is required by law to be fulfilled by giving

and talking the physical delivery of goods. In market parlance, the ready delivery contracts

are commonly known as “spot” or “cash” contracts.

All contracts in commodities providing for delivery of goods and/or payment of price after

11 days from the date of the contract are “forward” contracts. Forward contracts are of two

types – “specific delivery contracts” and “futures contracts”. Specific delivery contracts

provide future period, and in which the names of both the buyers and the sellers are

mentioned.

The term ‘futures contract’ is nowhere defined in the FCRA. But the Act implies that is a

forward contract, it is necessarily “a contract for the delivery of goods”. A futures contract

in which delivery is not intended is void (i.e., not enforceable by law), and is, therefore, not

permitted for trading at any commodity exchange.

SALIENT FEATURES OF A “COMMODITY FUTURES CONTRACT”:

Commodity futures contract is a tradable standardized contract, the terms of which are set

in advance by the commodity exchange organizing trading in it. The futures contracts is for

23
a specified variety of a commodity, known as the “basis”, though quite a few other similar

varieties, both inferior and superior, are allowed to be deliverable or tenderable for delivery

against the specified futures contract.

The quality parameters of the “basis” and the permissible tenderable varieties; the delivery

months and schedules; the places of delivery; the “on” and “of” allowances for the quality

differences and the transport costs; the tradable lots; the modes of price quotes; the

procedures for regular periodical (mostly daily) clearings; the payments of prescribed

clearing and margin monies; the transaction, clearing and other fees; the arbitration, survey

and other dispute redressing methods; the manner of settlement of outstanding transactions

after the last trading day, the penalties for nonissuance or non-acceptance of deliveries,

etc., are all predetermined by the rules and regulation of the commodity exchange.

Consequently, the parties to the contract are required to negotiate only the quantity to be

bought and sold the price. Everything else is prescribed by the Exchange. Because of the

standardized nature of the futures contract, it can traded with ease at a moment’s notice.

BASICS OF FUTURES TRADING:

Trading commodity futures and options is not for everyone. It is a volatile, complex, and

risky business. Before you invest any money in futures or options contracts, you should:

24
  Consider your financial experience, goals, and financial resources and know

how much you can afford to lose above and beyond your initial payment.

 Understand commodity futures and option contracts and your obligations in

entering into those contracts.

WHO USES FUTURES MARKET:

The futures market participants comprise of farmers, traders, producers, processors,

exporters, importers and industry associated with commodities. The futures market is used

for hedging the price risk and for trading or arbitrage. Brokers of exchange, who are

located all across the country, serve the futures market users directly through their own

branch offices’ network or through the network of their franchisees or sub-brokers.

 COMMODITY FUTURES TRADING

EVOLUTION OF COMMODITY MARKET IN INDIA:

25
Bombay Cotton Trade Association Ltd., set up in 1875, was the first organized futures

market. Bombay Cotton Exchange Ltd. was established in 1893 following the widespread

discontent amongst leading cotton mill owners and merchants over functioning of Bombay

Cotton Trade Association. The futures trading in oilseeds started in 1900 with the

establishment of the Gujarati Vyapuri Mandali, which carried on futures trading in

groundnut, castor seed and cotton. A future trading in wheat was existent at several places

in Punjab and Uttar Pradesh. But the most notable futures exchange for wheat was chamber

of commerce at Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920.

Calcutta Hessian Exchange Ltd. was established in 1919 for futures trading in raw jute

goods. But organized futures trading in raw jute began only in 1927 with the establishment

of east India Jute Association Ltd. to conduct organized trading in both raw jute and jute

goods. A forward contract (Regulation) Act was enacted in 1952 and the Forward Market

Commission (FMC) was established in 1953 under the Ministry of Consumer Affairs and

Public Distribution. In due course several other exchanges were created in the country to

trade in diverse commodities.

EMERGING TRENDS IN COMMODITY MARKET IN INDIA:

26
Commodity markets have existed in India for a long time, below Table gives the list of

registered commodities exchanges in India. The table gives the total annualized volumes on

various exchanges.

While the implementation of the Kabra Committee recommendations were rather show,

today, the commodity derivative market in India seems poised for a transformation.

national level commodity derivatives exchanges seem to be the phenomenon. The Forward

Markets Commission accorded in principle approval for the following National Level Multi

Commodity Exchanges. The increasing markets in India seem to be a promising game.

NATIONAL BOARD OF TRADE .

MULTI COMMODITY EXCHANGE OF TRADE.

27
NATIONAL COMMODITY &DERIVATIVES EXCHANGE OF INDIA LTD.

COMMOTITY EXCHANGE PRODUCTS APPROX. ANNUAL VOL

(RS. CRORE)

National Board of Trade, Indore Soya, Mustard 80000

National Multi-Commodity Multiple 40000

exchange, Ahmedabad
Rajdhani Oil & Oil Seeds Mustard 3500
Vijai Beopar Chamber Ltd, Gur 2500

muzzaffarnagar
Rajkot seeds Oil & bullion Castor, Groundnut 2500

Exchange
IPSTA,Cochin Pepper 2500
Chamber of commerce, hampur Gur, Mustard 2500
Bhatinda Om and Oil exchange Gur 1500
Ahmedabad Commodity Exchange Castor, cotton 3500
Other (mostly inactive) 1500
Total 140000

 COMMODITY EXCHANGE REGISTERED IN INDIA

Commodity Exchange Products traded

Bhatinda Om & Oil Exchange [Link]

The Bombay Commodity Exchange Ltd.
Sunflower Oil, Cotton (Seed and Oil),
Groundnut (Nut and Oil), Castor Oil,
Catoreseed, Sesamum (Oil and Oilcake),
Rice bran, Rice bran Oil and Oil Cake,
Crude Palm Oil
The Rajkot Seeds Oil & Bullion Groundnut Oil
Merchants

28
 Association Ltd. Castor Seed
The Kanpur Commodity Exchange Ltd. Rapeseed/Mustard Seed Oil and Cake
The Meerut Agro Commodities Gur
Exchange Co. Ltd.
The Spieces and Oilseeds Exchange Ltd. Turmeric
Sangli
Ahmedabad Commodities Exchange ltd. Cotton Seed, Castor Seed
Vijay Beopar Chamber Ltd., Gur
Muzaffarnagar
India Pepper & Spice Trade Association, Pepper
Kochi
Rajdhani Oils and Oilseeds Exchange Gur, Rapeseed/Mustard Seed Sugar
Ltd., Delhi Grade-M
National Board of Trade, Indore Rapeseed/Mustard Seed/ oil
Cake/Soyabean/Meal/Oil,Crude Palm
Oil
The Chamber of Commerce, Hapur Gur. Rapeseed/Mustard Seed
The East India Cotton Association, Cotton
Mumbai
The East India jute & Hessian Exchange Hessian, Sacking
Ltd., Kolkata
First Commodity Exchange of India Copra, Coconut Oil & Copra Cake
Ltd., Kochi
The Coffee Futures Exchange of India Coffee
Ltd.,
Bangalore
The Central India Commercial Exchange Gur
Ltd., Gwaliar

 FUNDAMENTAL ANALYSIS

DEFINITION:

“A method of security valuation which involves examining the company’s financials and

operations, especially sales, earnings growth potential, assets, debt, management, products,

and competition. Fundamental analysis is taken in to consideration only those variables that

29
are directly related to the company itself, rather than the overall state of the market or

technical analysis data.”

Fundamental analysis is a method used to determine the value of a stock by analyzing the

financial data that is ‘fundamental’ to the company. That means the fundamental analysis

takes in to consideration only those variables that are directly related to the company itself,

such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the

overall state of the market nor does it include behavioral variables in its methodology. It

focuses exclusively on the company’s business in order to determine whether or not the

stock should be bought or sold.

Critics of fundamental analysis often charge that the practice is either irrelevant or that it is

inherently flawed. The first group, made up largely of proponents of the efficient market

hypothesis, say that fundamental analysis is a useless practice since a stock’s price will

always already take in to account the company’s financial data. In other words, they argue

that it is impossible to learn any thing new about a company by analyzing its fundamentals

that the market as a whole does not already known, since everyone has access to the same

financial information. The other major argument against fundamental analysis is more

practical than theoretical. These critics charge that fundamental analysis is too unscientific

a process, and that it’s difficult to get a clear picture of a company’s value when there are

so many qualitative factors such as a company’s management and its competitive

landscape.

However, such critics are in the minority. Most individual investors and investment

professionals believe that fundamental analysis is useful, either alone or in combination

30
with other techniques. If you decide that fundamental analysis is the method for you, you’ll

find that a company’s financial statements (its income statement, its balance sheet, and its

cash flow statement) will be indispensable resources for your analysis. And even if you’re

not totally sold on the idea of fundamental analysis, it’s probably a good idea for you to

familiarize yourself with some of the valuation measures it uses since they are often talked

about in other types of stock valuation techniques as well.

 FUNDAMENTAL ANALYSIS TOOLS

These are the most popular tools of fundamental analysis. Which focus on earnings per

share, price to earnings ratio, price to sales ratio, price to book ratio, dividend yield.

 EARNINGS PER SHARE:

The over all earnings of a company is not in itself a useful indicator of a stock’s worth.

Low earnings coupled with low outstanding shares can be more valuable than high earnings

with a high number of outstanding shares. Earnings per share is much more useful

information than earnings by itself. Earnings per share (EPS) is calculated by dividing the

net earnings by the number of outstanding shares. For example:ABC company had net

earnings of $1 million and 100,000 outstanding shares for an EPS of 10

(1,000,000/100,00=10). This information is useful for comparing two companies in a

certain industry but should not be the deciding factor when choosing stocks.

31
 PRICE TO EARNING RATIO:

The price to earning ratio (P/E) shows the relationship between stock price and company

earnings. It is calculated by dividing the share price by the earnings per share. in our

example above of ABC company the EPS is 10 so if it has a price per share of $50 the P/E

is (50/10=5). The P/E tells you how much investors are willing to pay for that particular

company’s earnings. P/E's can be read in a variety of ways. A high P/E could mean that the

company is overpriced or it could mean that investors expect the company to continue to

grow and generate profits. A low P/E could mean that investors are wary of the company or

it could indicate a company that most investors have overlooked.

 PRICE TO SALES RATIO:

When a company has no earnings, there are other tools available to help investors judge its

worth. New companies in particular often have no earnings, but that does not mean they are

bad investments. The Price to Sales ratio (P/S) is a useful tool for judging new companies.

It is calculated by dividing the market cap (stock price times number of outstanding shares)

32
by total revenues. An alternate method is to divide current share price by sales per share.

P/S indicates the value the market places on sales. The lower the P/S the better the value.

 PRICE TO BOOK RATIO:

Book value is determined by subtracting liabilities from assets. The value of a growing

company will always be more than book value because of the potential for future revenue.

The price to book ratio (P/B) is the value the market places on the book value of the

company. It is calculated by dividing the current price per share by the book value per

share (book value / number of outstanding shares). Companies with a low P/B are good

value and are often sought after by long term investors who see the potential of such

companies.

 DIVIDENDS YIELD:

Some investors are looking for stocks that can maximize dividend income. Dividend yield

is useful for determining the percentage return a company pays in the form of dividends. It

is calculated by dividing the annual dividend per share by the stock's price per share.

33
Usually it is the older, well-established companies that pay a higher percentage, and these

companies also usually have a more consistent dividend history than younger companies.

Industry Analysis:

‘Webster’ defines an Industry as “a department or branch of a craft, art, business, or

manufacture.” And more specifically:

a) Group of productive or profit-making enterprises or organizations that have a

similar technological structure of production or supply technically substitutable

goods, services, or sources of income.

Industry analysis is a type of business research that focuses on the status of an industry or

an industrial sector (a broad industry classification, like "manufacturing"). A complete

industrial analysis usually includes a review of an industry's recent performance, its current

status, and the outlook for the future. Many analyses include a combination of text and

statistical data. There are many sources of industry analysis: investment firms, business and

trade periodicals, trade associations, and government agencies. To conduct a thorough

industry analysis, include a variety of sources.

For an analyst, industry analysis demands into :

 The key sector or sub-division of overall economic activity that influence particular

industries, and

34
 The relative strength or weakness of particular industry or other groupings under

specific sets of assumptions about economic activity.

Economic Analysis:

Economics studies the allocation of scarce resources among people – examining what

goods and services wind up in the hands of which people. Why scarce resources? Absent

scarcity, there is no significant allocation issue. All practical, and many impractical, means

of allocating scarce resources are studied by economists. Markets are an important means

of allocating resources, so economists study markets. Markets include stock markets like

the New York Stock Exchange, commodities markets like the Chicago Mercantile, but also

farmer’s markets, auction markets like Christie’s or Sotheby’s , eBay, or more ephemeral

markets,. In addition, goods and services (which are scarce resources) are allocated by

governments, using taxation as a means of acquiring the items. Governments may be

controlled by a political process, and the study of allocation by the politics, which is known

as political economy, is a significant branch of economics. Goods are allocated by certain

means, like theft, deemed illegal by the government, and such allocation methods

nevertheless fall within the domain of economic analysis. Other allocation methods include

gifts and charity, lotteries and gambling, and cooperative societies and clubs, all of which

are studied by economists. Some markets involve a physical marketplace. Traders on the

New York Stock Exchange get together in a trading pit.

Economic analysis is used in many situations. When British Petroleum sets the price for its

Alaskan crude oil, it uses an estimated demand model, both for gasoline consumers and

35
also for the refineries to which BP sells. The demand for oil by refineries is governed by a

complex economic model used by the refineries and BP estimates the demand by refineries

by estimating the economic model used by refineries. Economic analysis was used by

experts in the antitrust suit brought by the U.S. Department of Justice both to understand

Microsoft’s incentive to foreclose rival Netscape and consumer behavior in the face of

alleged foreclosure. Stock market analysts use economic models to forecast the profits of

companies in order to predict the price of their stocks. When the government forecasts the

budget deficit or considers a change in environmental regulations, it uses a variety of

economic models.

TECHNICAL ANALYSIS:

Definition:

”A method of evaluating securities by relying on the assumption that market data, such as

charts of price, volume, and open interest, can help predict future (usually short-term)

market trends. Unlike fundamental analysis, the intrinsic value of the security is not

36
considered. Technical analysts believe that they can accurately predict the future price of a

stock by looking at its historical prices and other trading variables. Technical analysis

assumes that market psychology influences trading in a way that enables predicting when a

stock will rise or fall. For that reason, many technical analysts are also market timers, who

believe that technical analysis can be applied just as easily to the market as a whole as to an

individual stock.”

Technical analysis uses a variety of charts and calculations to spot trends in the market and

individual stocks and to try to predict what will happen next. Technical analysts don't

bother looking at any of the qualitative data about a company (for example, its management

team or the industry that it is in); instead, they believe that they can accurately predict the

future price of a stock by looking at its historical prices and other trading variables.

Technical analysis assumes that market psychology influences trading in a way that lets

them predict when a stock will rise or fall. For that reason, many technical analysts are also

market timers, who believe that technical analysis can be applied just as easily to the

market as a whole as to an individual stock

. Critics of technical analysis, and there are many, say that the whole endeavor is a

waste of time and effort. They point to academic studies like Burton Malkiel's "A Random

Walk Down Wall Street" as evidence that there is no possible way to predict future prices

using historical prices . Others contend that if any such systems were found to be

successful, those who practiced them would be wealthy beyond their wildest dreams.

Technical analysts use dozens of different quantitative metrics in order to predict stock

37
prices. In this section, we'll introduce you to some of the most popular ones and explain to

you what they're all about, but first here are a few key terms you should know about:

 Support Level: The level that the technical analyst believes a stock price will not

fall below (also sometimes called a "floor")

 Resistance Level: The opposite of a support level, the level that the technical

analyst believes a stock price will not exceed.

 Breakout: If a stock surpasses the resistance level or falls below the support level, it

is said to be a "breakout."

 Advance-Decline Line: The total number of advancing issues minus the total

number of declining issues, added to a cumulative total.

MOVING AVERAGES:

Introduction:

Moving averages are one of the most popular and easy to use tools available to the

technical analyst. They smooth a data series and make it easier to spot trends, something

38
that is especially helpful in volatile markets. They also form the building blocks for many

other technical indicators and overlays.

Perhaps the most commonly used variable in technical analysis, the moving average for a

stock is the average selling price for the stock over a set period of time (the most common

being 20, 30, 50, 100 and 200 days). Moving average data is used to create charts that show

whether or not a stock's price is trending up or down. They can be used to track daily,

weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to

the average and the oldest numbers are dropped; thus, the average "moves" over time. In

general, the shorter the time frame used, the more volatile the prices will appear, so, for

example, 20 day moving average lines tend to move up and down more than 200 days

moving average lines.

RELATIVE STRENGTH:

Technical analysts use what is called relative strength in order to compare the price

performance of one stock to the entire market. The relative strength of a stock is calculated

by taking the percentage price change of a stock over a set period of time and ranking it on

a scale of 1 to 100 against all other stocks on the market. For example, a stock with a

relative strength of 90 has experienced a greater increase in its price over the last year than

the price increases experienced by 90% of all other stocks on the market. Some technical

analysts like stocks with high relative strength rankings, believing that stocks which have

recently gone up are more likely to continue going up. Other technical analysts believe that

a very high relative strength can be an indication that the stock is overbought and is ready

39
to fall. Relative strength is really a "rear view window" metric, measuring only how the

stock has done in the past, not how it will do in the future.

CHARTS:

Charts are the main tool that technical analysts use in order to plot their data and predict

prices. Technical analysts may use several different types of charts in order to conduct their

tests, including line charts, bar charts, and candlestick charts. Most of the time, analysts use

these charts in order to look for patterns in the data. Some of the more commonly used

patterns include:

 Cup and Handle: A pattern on a bar chart that is in the shape of the letter "U" over a

period of between 7 and 65 weeks. Once the stock price reaches the second peak of

the "U", technical analysts believe that the price will fall as investors who bought at

the previous peak start to unload their shares.

 Head and Shoulders: A chart formation in which a price exhibits three successive

rallies, the second one being the highest. The name derives from the fact that on a

chart the first and third rallies look like shoulders and the second looks like a head.

Some technical analysts consider it a sign that the stock will fall further.

 Double Bottom: A chart formation that looks like a "W". Technical analysts aim to

buy at one of the troughs and ride the stock higher.

VOLUMES:

Not all technical analysts focus exclusively on price. Many of them think that volume is

40
often times a better indication of where a stock is heading. Volume is simply the number of

shares of a stock that are traded over a particular period of time (e.g. 1 day or 30 days).

Some technical analysts calculate moving averages for volume, the same way others do for

price. Volume is important because it tells how active the stock was during a particular

time, which can in turn affect a stock's price. For example, if a stock falls precipitously but

volume was exceptionally light that day, this is not necessarily an indication that the stock

has fallen out of favor with the market, since the move was caused by a relatively small

number of sellers.

The ability to make commodity price forecasts is only the first step in the price decision

making process. The second, and often more difficult step, is market timing. Since

commodity futures markets are so highly leveraged ( initial margin requirements are

generally less than 10% of a contract’s value), minor price moves can have a dramatic

impact on trading performance. Therefore, the precise timing of entry and exit points is an

indispensable aspect of any market commitment. Timing is everything when dealing in the

commodities markets, and timing is almost purely technical in nature. This is where a

practical application of charting principles becomes absolutely essential in the price

forecasting and risk management process.

TREND LINES

Technical analysis is built on the assumption that prices trend. Trend Lines are an

important tool in technical analysis for both trend identification and confirmation. A trend

line is a straight line that connects two or more price points and then extends into the future

41
to act as a line of support or resistance. Many of the principles applicable to support and

resistance levels can be applied to trend lines as well.

 UPTREND LINE

An uptrend line has a positive slope and is formed by connecting two or more low points.

The second low must be higher than the first for the line to have a positive slope. Uptrend

lines act as support and indicate that net-demand (demand less supply) is increasing even as

the price rises. A rising price combined with increasing demand is very bullish, and shows

a strong determination on the part of the buyers. As long as prices remain above the trend

line, the uptrend is considered solid and intact. A break below the uptrend line indicates

that net-demand has weakened and a change in trend could be imminent.

 DOWNTREND LINE

A downtrend line has a negative slope and is formed by connecting two or more high

points. The second high must be lower than the first for the line to have a negative slope.

Downtrend lines act as resistance, and indicate that net-supply (supply less demand) is

increasing even as the price declines. A declining price combined with increasing supply is

very bearish, and shows the strong resolve of the sellers. As long as prices remain below

the downtrend line, the downtrend is solid and intact. A break above the downtrend line

indicates that net-supply is decreasing and that a change of trend could be imminent.

SUPPORT AND RESISTANCE

Support and resistance represent key junctures where the forces of supply and demand

meet. In the financial markets, prices are driven by excessive supply (down) and demand

42
(up). Supply is synonymous with bearish, bears and selling. Demand is synonymous with

bullish, bulls and buying. These terms are used interchangeably throughout this and other

articles. As demand increases, prices advance and as supply increases, prices decline. When

supply and demand are equal, prices move sideways as bulls and bears slug it out for

control.

What is support?

Support is the price level at which demand is thought to be strong enough to prevent the

price from declining further. The logic dictates that as the price declines towards support

and gets cheaper, buyers become more inclined to buy and sellers become less inclined to

sell. By the time the price reaches the support level, it is believed that demand will

overcome supply and prevent the price from falling below support

Where is support established?

Support levels are usually below the current price, but it is not uncommon for a security to

trade at or near support. Technical analysis is not an exact science and it is sometimes

difficult to set exact support levels. In addition, price movements can be volatile and dip

below support briefly. Sometimes it does not seem logical to consider a support level

broken if the price closes 1/8 below the established support level. For this reason, some

traders and investors establish support zones.

What is resistance?

43
Resistance is the price level at which selling is thought to be strong enough to prevent the

price from rising further. The logic dictates that as the price advances towards resistance,

sellers become more inclined to sell and buyers become less inclined to buy. By the time

the price reaches the resistance level, it is believed that supply will overcome demand and

prevent the price from rising above resistance

Where is resistance established?

Resistance levels are usually above the current price, but it is not uncommon for a security

to trade at or near resistance. In addition, price movements can be volatile and rise above

resistance briefly. Sometimes it does not seem logical to consider a resistance level broken

if the price closes 1/8 above the established resistance level. For this reason, some traders

and investors establish resistance zones.

There are three basic assumptions on which technical analysis is based:

1. The futures market discounts everything.

The technician believes that the price posted on the board of a commodity exchange

at any given time is the intrinsic value of the commodity based upon the

fundamental factors affecting the supply and demand of the product. Therefore, if

the fundamentals are already reflected in the price, market action (charts- price,

volume, open interest) is all that is needed to be studied to forecast future price

direction. Although not knowing the specifics of the fundamental news, the

technician indirectly studies the fundamentals by studying the charts which reflect

the fundamentals of the marketplace.

44
2. Prices move in trends

Prices can move in one of three directions, up, down or sideways. Once a trend in

any of these directions is in effect it usually will persist. The market trend is simply

the direction of market prices, a concept which is absolutely essential to the success

of technical analysis. Identifying trends is quite simple; a price chart will usually

indicate the prevailing trend as characterized by a series of waves with obvious

peaks and troughs. It is the direction of these peaks and troughs that constitutes the

market trend.

3. History repeats itself

Technical analysis includes the psychology of the market place. Patterns of human

behavior have been identified and categorized for several hundred years and are

repetitive in nature. The repetitive nature of the marketplace is illustrated by

specific chart patterns which will indicate a continuation of or change in trend.

List of categories of the technical analysis theory:

 Indicators (Oscillators, eg: Relative Strength Index RSI)

 Number theory (Fibonacci numbers, Gann numbers)

 Waves (Elliott wave theory)

45
 Gaps (High-Low, Open-Closing)

 Trends (Following Moving Average)

 Chart formations (Triangles, Head & Shoulders, Channels)

46
 CHAPTER-5

COMPANY PROFILE

Future Capital Holdings was conceptualized as a new age capital management

and investing business that could play a vital role in the development of the

47
consumption-led economy in India. As a company with an investing mindset, we
view India as an attractive long-term investment opportunity across asset classes.

Future Capital Holdings combines the entrepreneurial skills of world-class

professionals from reputed international and domestic companies with the national
scale and reach of the Future Group.

Future Group has pioneered and established a nation-wide chain of over 12 million
of retail space in 71 cities and 65 rural locations across the country. 

We will respect the fact that our investors have entrusted us with their
capital, our partners with their faith, our customers with their confidence and our
employees with their aspirations. We will measure our success by the success of
our stakeholders and will work diligently to ensure that we fulfill our fiduciary
responsibility. We firmly believe that the difference between a good
business and a great organisation is the integrity of its people. We will conduct
ourselves ethically and transparently in all our dealings, both internal and external.
We will maintain an environment which fosters creativity and encourages
innovation. We believe that this will enable us to attract, retain and nurture the best
talent and develop the business and thought leaders of tomorrow. We
will build an organization which has a positive mindset. By conducting every
interaction with respect and consideration, we will create a self-reinforcing culture
of success. We believe that it is our responsibility to contribute to the
environment in which we operate. By investing in our community, we will not only
improve our surroundings today, but also provide better opportunities for future
generations.

Dhanpal A. Jhaveri
Kishore Biyani
Executive Director
Chairman

48
 Rakesh Makkar
N Shridhar
Jt MD – Future Capital Financial Services
Chief Financial Officer
Ltd.

Rajesh Doshi
Shailesh Shirali
Sr. VP – Legal, Compliance & Company
MD – Wholesale Credit
Secretary

Business, Future Capital Holdings is

the third leg in the Indian financial services space beyond the traditional banking
and brokerage businesses.

Our vision is to be the premier, most trusted and innovative investing

business.

We launched our retail financial services offering in

June 2007, pursuant to an agreement with PRIL, under which we have the
exclusive right to provide financial products and services at present and future
malls, stores and retail outlets in India which are owned, controlled or managed by

49
PRIL and its subsidiaries. The retail financial services business, housed under a
100% subsidiary of FCH; Future Capital Financial Services Ltd ("FCFS") is
operated through 2 verticals; Retail Credit & Distribution. The Retail Credit
business is operated under the Future Money brand. The products offered by our
Retail Credit business are Personal loans, Consumption loans, Home equity loans
and Credit cards; under the name Future Card, through an agreement with ICICI
Bank, Life and Non–Life Insurance products (as a corporate agent of Future
Generali), third party mutual fund products and fixed deposit programs.

Our Wholesale Credit business taps a large and relatively

unaddressed market of mezzanine, promoter, project and acquisition financing,
and other special situations related financing. Our strong due diligence capabilities
across asset classes—private equity, real estate and special situations—allow us
to appropriately analyze risk. This capability coupled with our risk management
and credit systems and our access to entrepreneurs and developers through the
FCH-Future Group eco-system of partners and suppliers favorably positions us to
grow this business.

Recent news articles on FCH

'India's domestic consumption story intact": Sameer Sain
- Reuters , 18th Feb 2009
Back To Basics
- Business Today , 10th Feb 2009
Future Bright
- Business India, 7th Sept 2008
Urban Muscle
- Business Standard , 12th Aug 2008
Highest average income recorded in Chandigarh
- The Economic Times , 8th Aug 2008

50
Changing Perceptions
- Business India , 16th June 2008
The Gold Rush
- India Today, 18th Feb 2008
Talent sets a company apart
- Times of India, 6th Nov 2007
Future gets RBI nod for credit card
- Times Business, 5th Nov 2007
Reforms gains racing down country roads, finds study
- Times Business, 26th July 2007
Finance services firms' salaries head northward
- Economics Times, 18th July 2007

INDUSTRY PROFILE
Commodities Derivatives Exchange: Indian Scenario

In India, commodity markets have been in existence for decades. However, in 1975 the

Government banned forward contracts on commodities. Later in 2003, the Government of

India again allowed forward contracts in commodities. There have been over 20 exchanges

existing for commodities all over the country. However, these exchanges are commodity

51
specific and have a strong regional focus. The Government, in order to make the

commodities market more transparent and efficient, accorded approval for setting up of

national level multi commodity exchanges. Accordingly, three exchanges are there which

deal in a wide variety of commodities and which allow nation-wide trading. They are

1) National Multi Commodity Exchange (NMCE)

2) Multi Commodity Exchange (MCX)

3) National Commodities and Derivatives Exchange (NCDEX)

National Multi Commodity Exchange:

First state of the art demutualised multi-commodity Exchange, National Multi Commodity

Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions,

viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative

Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited

(GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of

Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL).

While various integral aspects of commodity economy, viz., warehousing, cooperatives,

private and public sector marketing of agricultural commodities, research and training were

adequately addressed in structuring the Exchange, finance was still a vital missing link.

Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even

today, NMCE is the only Exchange in India to have such investment and technical support

from the commodity relevant institutions. These institutions are represented on the Board

52
of Directors of the Exchange and also on various committees set up by the Exchange to

ensure good corporate governance. Some of them have also lent their personnel to provide

technical support to the Exchange management. The day-to-day operations of the Exchange

are managed by the experienced and qualified professionals with impeccable integrity and

expertise. None of them have any trading interest. The structure of NMCE is impossible to

replicate in India.

NMCE is unique in many other respects. It is a zero-debt company; following widely

accepted prudent accounting and auditing practices. It has robust delivery mechanism

making it the most suitable for the participants in the physical commodity markets. The

exchange does not compromise on its delivery provisions to attract speculative volume.

Public interest rather than commercial interest guide the functioning of the Exchange. It has

also established fair and transparent rule-based procedures and demonstrated total

commitment towards eliminating any conflicts of interest.

NMCE commenced futures trading in 24 commodities on 26 November 2002 on a national

scale and the basket of commodities has grown substantially since then to include cash

crops, food grains, plantations, spices, oil seeds, metals & bullion among others. Research

Desk of NMCE is constantly in the process of identifying the hedging needs of the

commodity economy and the basket of products is likely to grow even further. NMCE has

also made immense contribution in raising awareness about and catalyzing implementation

of policy reforms in the commodity sector. NMCE was the first Exchange to take up the

53
issue of differential treatment of speculative loss. It was also the first Exchange to enroll

participation of high net-worth corporate securities brokers in commodity derivatives

market. It was the Exchange, which showed a way to introduce warehouse receipt system

within existing legal and regulatory framework.

NMCE, India is committed to provide world class services of on-line screen based Futures

Trading of permitted commodities and efficient Clearing and guaranteed settlement, while

complying with Statutory / Regulatory requirements. We shall strive to ensure continual

improvement of customer services and remain quality leader amongst all commodity

exchanges. It was the first Exchange to complete the contractual groundwork for

dematerialization of the warehouse receipts. Innovation is the way of life at NMCE. It is

the only Commodity Exchange in the world to have received ISO 9001:2000 certification

from British Standard Institutions (BSI).

NMCE Mission:

 Continual Improvement in Customer Satisfaction.

 Improving efficiency of marketing through on-line trading in Dematerialization

form.

 Minimization of settlement risks.

54
 Improving efficiency of operations by providing best infrastructure and latest

technology.

 Rationalizing the transaction fees to optimum level.

 Implementing best quality standards of warehousing, grading and testing in tune

with trade practices.

 Improving facilities for structured finance.

 Improving quality of services rendered by suppliers.

 Promoting awareness about on-line features trading services of NMCE across the

length and breadth of the country.

55
MCX is an independent and de-mutulised multi commodity exchange. It was inaugurated

on November 10, 2003 by Mr. Mukesh Ambani, Chairman and Managing Director,

Reliance Industries Ltd.; and has permanent recognition from the Government of India for

facilitating online trading, clearing and settlement operations for commodities futures

market across the country. Today, MCX features amongst the world's top three bullion

exchanges and top four energy exchanges.

MCX offers a wide spectrum of opportunities to a large cross section of participants

including producers/ processors, traders, corporate, regional trading centre, importers,

exporters, co-operatives and industry associations amongst others. Headquartered in the

financial capital of India, Mumbai, MCX is led by an expert management team with deep

domain knowledge of the commodities futures market.

Presently, the average daily turnover of MCX is around USD1.55 bn (Rs.7, 000 crore -

April 2006), with a record peak turnover of USD3.98 bn (Rs.17, 987 crore) on April 20,

2006. In the first calendar quarter of 2006, MCX holds more than 55% market share of the

total trading volume of all the domestic commodity exchanges. The exchange has also

affected large deliveries in domestic commodities, signifying the efficiency of price

discovery.

56
Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering

multiple commodities for trading with wide reach and penetration, MCX is well placed to

tap the vast potential poised by the commodities market.

Key shareholders

Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for

Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.

(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank,

Union Bank of India, Canara Bank, Bank of India, Bank of Baroda , HDFC Bank and SBI

Life Insurance Co. Ltd.

Vision of MCX:

MCX will offer ‘unparalled efficiencies’, unlimited growth’ and ‘infinite opportunities’ to

all market participants. It will be acknowledged as the ‘Exchange of Choice’, based on its

strong service availability backed by superior technology.

MCX is committed towards revolutionizing the Indian commodity markets. It aims to

empower the market participants through innovative product offerings and business rules;

so that the benefits of futures markets can be fully realized. MCX will focus its efforts

towards meeting the requirements of all the stakeholders in the commodity ecosystem

without any bias. It shall focus its efforts towards establishing globally acceptable industry

norms.

Winning Edge of MCX:

57
Neutral Image:

MCX's most important strength is that it is an independent and de-mutualized exchange

since inception.

Value Proposition:

Headquartered in the financial capital of India, Mumbai, MCX is led by an expert

management team with deep domain knowledge of the commodities futures market. It also

has strong partnerships with banks, financial institutions, warehousing companies and other

stakeholders of the marketplace.

Insurance of Settlement Guarantee Fund:

MCX is the only domestic exchange which has insured its ‘Settlement Guarantee Fund’, to

the tune of Rs.100 crores by ‘The New India Assurance [Link].'S

Strategic Equity Partnerships:

MCX’s wide based strategic equity partners include - Financial Technologies (I) Ltd., State

Bank of India Ltd. and it’s associates, National Bank for Agriculture & Rural Development

(NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. - an

affiliate of Fidelity International, Corporation Bank Ltd., Union Bank of India Ltd., Canara

Bank Ltd., Bank of India Ltd., Bank of Baroda Ltd., HDFC Bank Ltd., SBI Life Insurance

Co. Ltd.

58
Trade Support:

MCX has already tied up exclusively with some of the largest players in the commodities

eco-system namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent

Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United

Planters Association of India and India Pepper & Spice Trade Association. MCX has also

established the National Gold Delivery market in partnership with World Gold Council.

International Alliances:

MCX has various strategic Memorandum of Understandings/ Licensing Agreements with

global exchanges like The Tokyo Commodity Exchange (TOCOM); The Baltic Exchange,

London; Chicago Climate Exchange (CCX); New York Mercantile Exchange (NYMEX),

London Metal Exchange (LME); Dubai Multi Commodities Centre (DMCC); New York

Board of Trade (NYBOT) and Bursa Malaysia Derivatives, Berhad (BMD)

FTIL: Technology Partner:

Financial Technologies India Ltd’s (FTIL) proven mettle of end-to-end exchange trading

technologies addressing trading/ surveillance/ clearing and settlement operations help

enhance the MCX Trade Life Cycle operations (Pre-Trade, Trade and Post-Trade). In

addition to its technological capabilities, FTIL also brings to MCX its associations with

technology giants such as Microsoft/ Intel and HP.

59
National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally

managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI

Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural

Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab

National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of

India Limited), Indian Farmers Fertiliser Cooperative Limited (IFFCO) ,Canara Bank and

Goldman Sachs by subscribing to the equity shares have joined the initial promoters as

shareholders of the Exchange.

NCDEX is the only commodity exchange in the country promoted by national level

institutions. This unique parentage enables it to offer a bouquet of benefits, which are

currently in short supply in the commodity markets. The institutional promoters of NCDEX

are prominent players in their respective fields and bring with them institutional building

experience, trust, nationwide reach, technology and risk management [Link] is a

public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It

obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced

its operations on December 15, 2003.

NCDEX is a nation-level, technology driven de-mutualized on-line commodity exchange

with an independent Board of Directors and professionals not having any vested interest in

commodity markets. It is committed to provide a world-class commodity exchange

platform for market participants to trade in a wide spectrum of commodity derivatives

60
driven by best global practices, professionalism and transparency. NCDEX is regulated by

Forward Market Commission in respect of futures trading in commodities. Besides,

NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act,

Contracts Act, Forward Commission (Regulation) Act and various other legislations, which

impinge on its working.

NCDEX is located in Mumbai and offers facilities to its members in more than 550 centres

throughout India. The reach will gradually be expanded to more centres. NCDEX currently

facilitates trading of 54 commodities - Cashew, Castor Seed, Chana, Chilli LCA334,

Coffee - Arabica, Coffee - Robusta, Cotton Seed Oilcake, Crude Palm Oil, Groundnut (in

shell), Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags,

Indian 28 mm Cotton , Indian 31 mm Cotton , Lemon Tur, Masoor Grain Bold, Medium

Staple Cotton, Mentha Oil , Mulberry Green Cocoons ,Rapeseed - Mustard Seed ,Pepper

,Potato ,Raw Jute, Indian ParboiledRice(IR-36/IR-64),IndianRawRice(ParmalPR-

106),RBD Palmolein

RMSeed Oil Cake, Refined Soy Oil , Rubber, Sesame Seeds, Soy Bean, Sponge Iron,

Expeller Mustard Oil ,Mulberry Raw Silk,V-797 Kapas, Sugar, Turmeric, Urad,Wheat,

Yellow Peas, Yellow Red Maize, Yellow Soybean Meal,Electrolytic Copper Cathode,

Aluminium Ingot, Nickel Cathode, Zinc Metal Ingot, Mild Steel Ingots, Gold KG, Silver,

Brent Crude Oil, Furnace Oil. At subsequent phases trading in more commodities would

be facilitated.

61
Key shareholders:

Financial Technologies (I) Ltd., State Bank of India and it's associates, National Bank for

Agriculture and Rural Development (NABARD), National Stock Exchange of India Ltd.

(NSE), Fid Fund (Mauritius) Ltd. - an affiliate of Fidelity International, Corporation Bank,

Union Bank of India, Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and Life

Insurance Corporation of India.

Commodities Derivatives Exchanges-Global Scenario

Globally, commodities derivative exchanges have existed for a long period of time. The

Chicago Board of Trade is one of the oldest derivatives exchange in the world. Now

commodities exchanges exist all over the world and wide variety of commodities are traded

all over the world in these exchanges.

The major Commodities Exchanges of the world are as follows:

Chicago Board of Trade [CBOT] USA

New York Mercantile Exchange [NYME] USA

London Metal Exchange [LME] UK

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Tokyo Commodity Exchange [TOCOM] JAPAN

South Africa Futures Exchange [SAFEX] SOUTH AFRICA

Shanghai Futures Exchange [SFE] CHINA

Honkong Futures Exchange [HKFE] HONKONG

Chicago Board Of Trade [CBOT]

The Chicago Board of Trade [CBOT], established in 1848, is a leading futures exchanges

in the world. More than 3600, CBOT members trade 50 different futures and options

products at the exchange through open auction as well as electronically. Volumes at the

exchange have crossed in 600 million contracts. Earlier CBOT traded only in agricultural

commodities such as corn, wheat, oats and soybeans. Futures contracts at the exchange

evolved over the years to include non-storable agricultural commodities and non-

agricultural products such as gold and silver. The CBOT’s first financial futures contract

was launched in October 1975, was based on the Government National Mortgage

Association mortgage backed certificates. Since that introduction, futures trading has been

initiated in many financial instruments, including US Treasury Bonds, and Notes, stock

indexes and swaps etc; Another innovation in the markets was the introductions of Options

on futures in 1982.

For more than 150 years, the primary method of trading at CBOT was open auction, which

involved traders meeting face to face in trading pits to buy and sell futures contracts. But to

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better meet thee needs of a growing global economy, the CBOT successfully launched its

first electronic trading system in 1994.

During the last decade, the use of electronic trading system has become more prevalent, the

exchange has upgraded its electronic trading system several times. On January 1, 2004

CBOT introduced a new electronic trading system with cutting edge technology.

New York Mercantile Exchange [NYMEX]

The NYMEX in its current form was created in 1994 by the merger of the former New

York Mercantile Exchange and Commodity Exchange of New York. Today, both of them

together represent one of the world’s largest market in the commodities trading.

NYMEX deals in futures and options in oil products such as crude oil, natural gas, heating

oil, propane and in rare metals, such as platinum and palladium. NYMEX also deals in

gold, silver, copper and aluminum, sharing with the London Metal Exchange plays a

dominant role in world metal trading.

London Meal Exchange:

The London Metal Exchange is the world’s premier non ferrous metals market with highly

liquid contracts and a worldwide reputation. It is a innovative while maintaining its

traditional strengths and remains close to its core users by ensuring its contracts continue to

meet the expectations of industry. As a result, it is highly successful with turnover in excess

64
of US$ 3,000 billion per annum. It also contributes to UK’s invisible earnings to the sum of

more than 250 million pounds in overseas earnings each year.

The origins of the London Metal Exchange can be traced as far back as opening of the

Royal Exchange in 1571. This is where metal traders first began to meet on regular basis.

However, it was in 1877 that the London Metal Market and Exchange Company was

formed as a direct result of Britain’s Industrial revolution of the 19 century. This led to

massive increase in the UK’s consumption of metal, which required the import of

enormous tonnages from abroad. Merchant venture’s were investing large sums of money

in this activity and were exposed to great risk, not only because the voyages were

hazardous but also because the cargoes could lose value if there was fall in price during the

time it took for the metal to reach Britain.

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 CHAPTER-6

DATA ANALYSIS

AND

INTERPRETATION

DATA ANALYSIS AND INTERPRETATION OF ENERGY COMMODITIES

66
INTRODUCTION TO CRUDE OIL

CRUDE OIL

A mineral oil consisting of a mixture of hydrocarbons of natural origin, yellow to black in

color, of variable specific gravity and viscosity, often referred to simply as crude.

OR

A fossil fuel formed from plant and animal remains many millions of years ago. It

comprises organic compounds built up from hydrogen and carbon atoms and is ,

accordingly, often referred to as hydrocarbons. Crude oil is occasionally found in springs or

pools but is usually drilled from wells beneath the earth’s surface.

VARIETIES OF CRUDE OIL

The petroleum industry often characterizes crude oils according to their geographical

source, e.g., Alaska north slope crude. Oils from different geographical areas have unique

properties: they can vary in consistency from a light volatile fluid to a semi-solid.

The classification scheme provided below is more useful in a response scenario.

 Class A: Light, Volatile Oils- These oils are highly fluid, often clear, spread rapidly

on solid or water surfaces, have a strong odor, a high evaporation rate, and are

67
 usually flammable. They penetrate porous surfaces such as dirt and sand and may

be persistent in such a matrix. They do not tend to adhere to surfaces; flushing with

water generally removes them. Class A oils may be highly toxic to humans, fish and

other biota. Most refined products and many of the highest quality light crude’s can

be included in this class.

 Class B: Non-Sticky Oils-These oils have a waxy or oily feel. Class B oils are less

toxic and adhere more firmly to surfaces than class A oils, although they can be

removed from surfaces by vigorous flushing. As temperatures rise, their tendency to

penetrate porous substrates increases and they can be persistent. Evaporation of

volatiles may lead to a class C or D residue. Medium to heavy paraffin-based oils

fall into this class.

 Class C: Heavy, Sticky Oils-Class C oils are characteristically viscous, sticky or

tarry, and brown or black. Flushing with water will not readily remove this material

from surfaces, but the oil does not readily penetrate porous surfaces. The density of

class c oils may be near that of water and they often sink. Weathering or

evaporation of volatiles may produce solid or tarry class d oil. Toxicity is low, but

wildlife can be smothered or drowned when contaminated. This class includes

residual fuel oils and medium to heavy crudes.

 Class D: Nonfluid Oils-class D oils are relatively non-toxic, do not penetrate porous

substrates, and are usually black r dark brown in color. When heated, class D oils

may melt and coat surfaces making cleanup very difficult. Residual oils, heavy

crude oils, some high paraffin oils and some weathered oils fall into this class.

68
These classifications are dynamic for spilled oils; weather conditions and water

temperature greatly influence the behavior of oil and refined petroleum products in the

environment. For example, as volatiles evaporate from a class B oil, it may become a class

C oil. If a significant temperature drop occurs (e.g., at night), a class c oil may solidify and

resemble a class D oil. Upon warming, the class D oil may revert back to a class C oil.

Categories of crude oil

 West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is

39.6 degrees (making it a “light” crude oil), and it contains only about 0.24 percent

of sulfur (making a “sweet” crude oil). WTI is generally priced at about a $2-4 per-

barrel premium to OPEC basket price and about $1-2 per barrel premium to Brent,

although on a daily basis the pricing relationships between these can very greatly.

 Brent crude oil stands as a benchmark for Europe.

 India is very much reliant on oil from the Middle East (high sulphur). The OPEC

has identified china& India as their main buyers of oil in Asia for several years to

come.

Indian in world crude oil industry

Petroleum and natural gas. The recent exploration and production activities in the country

have led to a dramatic increase in the output of oil. The country currently produces 35

69
million tones of crude oil, two-thirds of which is from offshore areas ad imports another 27

million tones. Refinery production in terms of crude throughput of the existing refineries is

about 54 million tones.

Natural gas production has also increases substantially in recent years, with the country

producing over 22,000 million cubic meters. Natural gas is rapidly becoming an important

source of energy and feed stock for major industries. By the end of the eight five year plan,

production was likely to reach 30 billion cubic meters.

Factors influencing crude oil markets

 Shortage of oil supplies

 Taxation-when oil taxes are raised, end consumers often mistakenly blame the oil

producers, but it is really their own governments that are responsible.

 Balance of demand and supply in the short term

 Rate of investment in the longer term

 Accidents

 Bad weather

 Increasing demand

 Halting transport of oil from producers

 Labour disputes

Note: if traders I the oil market believe there will be a shortage of oil supplies, they may

raise prices before a shortage occurs.

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Crude oil reserves

World crude oil reserves are estimated at more than one trillion barrels, of which the 11

OPEC member countries hold more than 75 percent. OPEC members currently produce

around 27 million to 28 million barrels per day of oil, or some 40 percent of the world total

output, which stands at bout 75 million barrels per day.

Is the world running out of oil?

Oil is a limited resource, so it may eventually run out, although not for many years to come.

OPEC’s oil reserves are sufficient to last another 80 years at the current rate f production,

while non-OPEC oil producers’ reserves might last less than 20 years. The worldwide

demand for oil is rising and OPEC is expected to be an increasingly important source of

that oil.

If we manage our resources well, use the oil efficiently and develop new fields, then our oil

reserves should last for many more generation to come

Uses of crude oil

 Gasoline

 Petrol

 Liquefied Petroleum gas(LPG)

 naphtha

 kerosene

 gasoil

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  fuel oil

 lubricants

 asphalt(used in paving roads)

 ethane

 ethylene

 propylene

 butadiene

 benzene

 ammonia

 methanol

 plastics

 synthetic fibres

 synthetic rubbers

 detergents

 Chemical fertilizers.

Exchanges dealing in crude futures apart form MCX

 The New York Mercantile Exchange(NYMEX)

72
  The International Petroleum Exchange of London(IPE)

 The Tokyo Commodity Exchange (TOCOM)

Crude oil units (average gravity)

 1 US barrel = 42 US gallons

 1US barrel= 158.98 litres

 1 tonne= 7.33 barrels

 1 short ton= 6.65 barrels

Note: barrels per tonne vary from origin to origin.

4.1 FUNDAMENTAL ANALYSIS OF CRUDE OIL

73
INDUSTRY ANALYSIS OF CRUDE OIL

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 has been 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 have averaged $23.57 per barrel adjusted for inflation to 2006

dollars. In the absence of price controls the U.S. price would have tracked the world price

averaging $25.56. Over the same post war period the median for the domestic and the

adjusted world price of crude oil was $18.43 in 2006 prices. That means that only fifty

percent of the time from 1947 to 2008 has oil prices exceeded.

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

oil prices only exceeded $23.00 per barrel in response to war or conflict in the Middle East.

With limited spare production capacity OPEC has abandoned its price band and for close to

three years was powerless to stem a surge in oil prices which was reminiscent of the late

1970s.

Crude oil prices 1969-2009

74
Middle East Supply Interruptions

Yom Kippur War - Arab Oil Embargo

In 1972 the price of crude oil was about $3.00 per barrel and 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 strong support for Israel. As a result of this support several Arab

exporting nations imposed an embargo on the countries supporting Israel. Arab nations

curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up

by increased production in other countries. The net loss of 4 MMBPD extended through

March of 1974 and represented 7 percent of the free world production.

U.S. and World Events and Oil Prices 1973-1981

75
If there was any doubt that the ability to control crude oil prices had passed from the United

States to OPEC it 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 world crude oil prices were relatively flat ranging from $12.21 per

barrel to $13.55 per barrel.  When adjusted for inflation the price over that period of time

exhibited a moderate decline.

OPEC”S Failure to Control Oil Prices

OPEC has seldom been effective at controlling prices. While often referred to as one OPEC

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

to enforce member quotas.  During the 1979-1980 period of rapidly increasing prices,

76
Saudi Arabia's oil minister Ahmed Yamani repeatedly warned other members of OPEC that

high prices would lead to a reduction 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 mileage. 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 and would not respond to lower

prices with increased demand for oil.

77
The higher prices also resulted in increased exploration and production outside of OPEC.

From 1981 to 2007 non-OPEC production increased 10 million barrels per day. OPEC was

faced with lower demand and higher supply from outside the organization

A December 1986 OPEC price accord set to target $18 per barrel was already breaking

down by January of 1987. Prices remained weak. The price of crude oil spiked in 1990 with

the uncertainty associated Iraqi invasion of Kuwait and the ensuing Gulf War, but

following the war crude oil prices entered a steady decline until in 1994 inflation adjusted

prices attained their lowest level since 1973.

78
After the collapse

Several trends established were established in the wake of the collapse in crude prices. The

lag of over a year for drilling to respond to crude prices is now reduced to a matter of

months. (Note that the graph on the right is limited to rigs involved in exploration for crude

oil as compared to the previous graph which also included rigs involved in gas

exploration.) Like any other industry that goes through hard times the oil business emerged

smarter, leaner and more conservative. Industry participants, bankers and investors were far

more aware of the risk of price movements. Companies long familiar with accessing

geologic, production and management risk added price risk to their decision criteria.

Technological improvements were incorporated:

 Increased use of 3-D seismic data reduced drilling risk.

 Directional and horizontal drilling led to improved production in many reservoirs.

 Financial instruments were used to limit exposure to price movements.

 Increased use of CO2 floods and improved recovery methods to improve production

in existing wells.

In spite of all of these efforts the percentage of rigs employed in drilling for crude oil

decreased from over 60 percent of total rigs at the beginning of 1988 to under 15 percent

until a recent resurgence

79
What causes high oil prices?

High crude oil prices could be due to a shortage of oil supplies. High prices for oil products

- as purchased by end consumers such as motorists - are more likely to reflect other factors,

such as taxation.

Crude oil prices react to the balance of demand and supply in the short term, and the rate of

investment in the longer term. If investment is not made far enough in advance, oil supplies

could be limited in the longer term, thus raising prices. Sentiment is also an important

factor: if traders in the oil market believe there will be a shortage of oil supplies, they may

raise prices before a shortage actually occurs. Other factors influencing the price of crude

oil include accidents, bad weather, increasing demand, halting transport of oil from

producers, labor disputes (strikes) as well as other disruptions to production including war

and natural disasters.

Crude oil now represents less than a quarter of the price of oil products in many countries.

Therefore, taxes have more influence over the price of oil products. When oil taxes are

raised, end consumers often mistakenly blame the oil producers, but it is really their own

governments that are responsible.

OPEC seeks a stable oil market, without sudden price changes or excessively high or low

prices. OPEC regularly meets with other oil producers and with consumers in an effort to

improve understanding and trust in the oil industry and to seek policies and measures that

do not create unnecessary economic hardship for oil producers or consumers.

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What causes low oil prices?

Low prices of crude oil can be caused by a number of factors. Basically, it could be due to

an imbalance between supply and demand - too much supply or too little demand.

OPEC Member Countries have always tried to adjust their crude oil supplies to improve the

balance between supply and demand. OPEC's aim at all times is to maintain steady supplies

of oil to consumers, while securing a reasonable return for its Member Countries. However,

OPEC cannot be expected to achieve this on its own.

Most non-OPEC oil producers supply as much oil as they can. This makes it difficult for

OPEC to maintain stability in the oil market and results in losing market share and potential

revenue for the organization.

If oil production rises faster than demand, then prices can fall and all oil producers will

suffer. In the long run, consumers will also suffer if the oil industry is unprofitable and

unattractive to investors.

Production of crude oil in India

India is not among the major producers of crude oil, as it doesn’t have much oil reserves.

That is why it generally depends on imports of crude oil from other countries. However, the

production of oil and as a result the production of its by-products in India has increased in

the recent past due to exploration and findings of new oil reserves. India currently has an

estimated quantity of 5.4 billion barrels of oil reserves out of which it produces around 0.8

million barrels per day. At this production level, the oil reserves in India would last for

around 29 years. The major oil reserves of the country are situated at

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  Mumbai high (Mumbai)

 Upper Assam (Assam)

 Cambay (Gujarat)

 Krishna-Godavari basin (Andhra Pradesh)

 Cauvery basin (Tamil Nadu)

 Nagaland

 Arunachal Pradesh

The largest crude oil producing oilfield is the Mumbai high field that produces around

260000 barrels per day. Among these production centers, major share of production i.e.

2/3rd share is bagged by the offshore reserves as compared to onshore reserves. The

refining capacity of crude oil in India is over 2.1 million barrels per day. The refining

sector in India is held by both public and private sector, public sector being the dominating

one.

According to the Energy Information Administration, the total world demand for energy

has increased by 32% between 1980 and 1998. During the same period, the population

increased by 33%. While the rate of increase in population is declining, with a predicted

peak of 10 to 11 billion, there is no indication that energy use will be stabilizing soon. In

fact, while the increase in demand is moderating in the United States, the less developed

countries are at the beginning of a period of rapid growth in energy consumption. As

industrialization progresses, they will require more energy for industry, to meet consumer

demand generated by increasing wealth, and many LDCs still face high rates of population

growth. To meet these demands will take ever greater production of limited resources.

Countries like China with an abundance of coal will most likely be forced to develop these

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resources in spite of environmental damage caused by sulfur dioxide and carbon dioxide. In

order to meet demands for electricity, China with the aid of the World Bank is planning on

tripling the number of coal fired power plants in the the next 25 years.

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Oil Production - How Much Is There?

In 1998 40% of the World's energy was derived from oil and 23% from coal. Most of the

increased energy demand will be met by increased oil production in the OPEC Countries.

Oil production in North America is expected to be flat or declining, and other areas do not

have the potential for major increases in production.

Estimates of the total world oil supply that is economically recoverable vary, but the

consensus is approaching the peak in production within the next 10 years. These estimates

also indicate that by around the year 2025, then it has been used up to 80% of the world's

oil in roughly 60 years, a remarkable achievement. The various models also show that new

discoveries will not shift the production peak, but will merely flatten out the rate of decline.

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The graph below shows the production curves based on a model by Duncan, and the

estimates by the Department Of Energy. The DOE estimates are clearly the most

optimistic, and were derived from a model based on demand with limited consideration

given to supply constraints. Their assumption was that as demand increases, capital will be

made available to the OPEC Countries that will enable supply to keep up with demand

If the DOE predictions turn out to be correct and the peak is moved farther into the future,

the ultimate decline will be steeper. There is a limit to the supply of oil and it is highly

unlikely that any large reserves comparable to those in the Middle East will be discovered

in the future. Technological improvements can alter the efficiency and rate of extraction,

but the total supply is fixed, and reasonably well known

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 ECONOMIC ANALYSIS Crude Oil

SHARE OF CRUDE OIL IN INDIA’S GDP:

 Share of commercial energy in total energy use in India has gone up from 29% in

1953-54 to 68.2% in 2001-02 and is expected to go up to 76.5% by 2001-12.

 The initial shift towards commercial energy use was mainly on account of increased

usage of oil. Share of oil in total energy consumption more than doubled from 5.5%

in 1960-61 to 13.4% in 1970-71

 share of oil in total energy consumption went up slowly to 24.5% in the next two

decades and it is expected to stabilize close to that level till 2011-12

 Share of domestic production of crude oil was only 28.7% while 71.3% were

imports. Total crude oil production in 2003-04 was 33 million tons while imports

were as high as 90 million tons. The average annual rate of growth of crude oil

production in the country over the last 6 years was a negative 0.2%

 Production of petroleum products has grown by an annual average rate of 10% over

the last six years with output going up from 65 million tons in 1997-98 to 113

million tons in 2003-04

 Increase in domestic production of petroleum products has led to a decline in

imports from 23 million tons in 1997-98 to 8 million tons in 2003-04 and also a

pick up in exports from 2 million tons to 15 million tons.

 Net imports of petroleum production have fallen from 21 million tons of inflows in

1997-98 to 7 million tons of outflows in 2003-04

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  Long term trends show that growth of sales of petroleum production in the country

had initially pricked up from an average annual rate of 4.8% in 1974-79(fifth plan)

to a peak level of 6.9% in 1985-90(eight plan)

 Since then, the growth rate of petrol sales have slowed down to 4.9% in 1997-

2002(ninth plan) and is expected to further slow down to 3.7% in the tenth plan

(2002-07).

Global trends: The major turning point

 In 2004 the international energy agency has to revise upwards its estimates for

global oil demand by over 3 million barrels per day, one of the largest margins of

such revision in recent decades. This was mainly because of the strong demand for

oil in china and the United States.

 A shift in preferences towards fuel inefficient vehicles in the United States was

another factor. The other factor that contributed to the increase in demand for oil in

the united state was the sharp increase in natural gas prices. The US had also been

building up its strategic petroleum reserves from 600 million barrels in late 2001 to

660 million barrels by end 2004 further adding to the tight market conditions.

 China and the united states account from around 44% of the incremental increase in

global oil demand between 1995 and 2004

 The excess capacity with OPEC countries now stands at less than 1 million barrels

per day, the lowest levels since the early nineties. By end of 2003 OPEC abandoned

its attempts to keep oil prices in the $22-$28 per barrel band as significant swing

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 producers like Saudi Arabia and UAE failed to increase production in line with

demand increases.

 On reason for this was the failure to step up investments for increasing production

capacity in recent years. A lack of transparency, that deprives the market of reliable

up to date information on global supplies, also adds to the problems. It has been

estimated that additional spare capacity (relatively to current levels) of 5 million

barrels per day may reduce price volatility by 50 %.

 Projections made by the World Bank show that double digit growth in oil prices is

now set to continue into the third consecutive year.

 Average crude oil price, which went up by 16.1% in 2003 and by 30.4% in 2004, is

projected to increase by 11.4% in 2005 to $42 per barrel of crude.

Oil intensity across countries

 Oil intensity or use of oil per unit of output, has reduced by half over the last 30

years in the developed countries and by about one third in the developing countries.

 Our estimates for 2003 show that oil intensity adjusted for price differential in

output in India was the same as that in china and less than half of than in unites

states.

 Similarly in the developed countries the oil intensity in real terms was the lowest in

United Kingdom, followed by Germany and France. Among developing counties

the lowest oil intensity in real terms was in India and china followed by brazil and

Nigeria.

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  The countries with the highest oil intensity in real terms would include Canada,

unites states, Indonesia South Korea and Thailand.

Table: oil intensity in major countries based on GDP at purchasing power parity basis

1999 2000 2001 2002 2003

Canada 0.13 0.12 0.12 0.11 0.11
Unites states 0.11 0.11 0.10 0.10 0.10
Japan 0.06 0.06 0.07 0.07 0.06
Brazil 0.08 0.08 0.08 0.07 0.07
France 0.07 0.07 0.07 0.06 0.06
Germany 0.07 0.07 0.07 0.06 0.06
United 0.07 0.06 0.06 0.06 0.05

kingdom
Egypt 0.11 0.12 0.11 0.11 0.10
Nigeria 0.09 0.09 0.10 0.08 0.08
China 0.05 0.05 0.05 0.04 0.04
India 0.05 0.05 0.04 0.04 0.04
Indonesia 0.08 0.08 0.08 0.08 0.08
South Korea 0.15 0.14 0.13 0.12 0.11
Thailand 0.10 0.10 0.09 0.09 0.09

Impact of oil prices on Indian economy:

 An study done by the Asian development ban of the impact of a

temporary/sustained high oil prices on the Asian economics using the oxford

economic forecasting world macro economic model without accounting for any

policy changes shows the varying impact on growth , trade flows and inflation

levels across countries.

 However, the analysis suffers from some major drawbacks. For instance it is based

on the proposition that the ratio of oil consumption to GDP calculated at nominal

89
 exchanges rates in both china and India is about 2.5 times higher than in the OECD

countries.

 This is in stark contrast to a more recent analysis of the international monetary fund

where the oil intensity ratio is calculated in terms of GDP at purchasing power

parity.

 The estimates of oil intensity based on purchasing power parity in fact show that

oil intensity in India and china are broadly similar and is less than half of that in

united states and Canada and even lower than that of Japan.

 Estimation of oil intensity based on GDP estimated on purchasing power parity

would provide more realistic picture given that price levels are generally much

lower in the developing countries. The gradual reduction of tariff protection has

ensured that prices of most goods in countries like India are closer to global levels

or even much lower. The lower prices are much more extensive in the services

sector, which accounted for 52.4% of the Indian economy in 2004-05.

 The use of GDP based on purchasing power parity in the calculation of oil intensity

is also validated by the fact that the figures on oil consumption are measured in

terms of volumes of input(million tons of oil equivalent-mtoe) while the GDP

estimated on the market exchange rate gives only the value of output and not the

actual volumes. It is only the GDP estimated on a purchasing power parity basis

which gives some indicator so the volume of output which should form the basis of

cross country comparison of output and estimation of oil intensity therein.

 The main factor here is the high levels of diesel consumed in industry, mainly for

generating power. In India close to a quarter of the diesel sales were to industry-

90
 mainly to fuel the captive power plants. In contrast in a free market oil energy

sector like in the unites states the share of industry in diesel consumption was only

12.5% just half that of India.

 Figures for 2003-04 show that the dependence of Indian industry on diesel based

captive power plants for energy consumption was as high as 13.9% in 2003-04

 Estimates show that use of diesel based power plants for energy was the highest in

textiles (32.4%), automobiles (19.7%), cement (19.5%), food products (18.9%),

chemicals (15.8%) and engineering industries (15.5%).

 Annual figures show only three instances when domestic oil prices have registered

double –digit growth for two or more consecutive years over the last 22 years

period; in the early eighties( 1983-84 to 1984-85), early ninities91991-92 to 1993-

94) and the early part of current decade9200-01 to 2001-02). Double-digit oil price

increase in 2005-06 will mean another high intensity increase in oil prices that

extends into the second year.

 Table: Impact of increase in oil prices on growth and inflation levels in India

International oil Increase in Extent of fall in Extent of fall in Extent of

prices per international oil manufacturing GDP growth increase in WPI

barrel($) prices (%) sector growth (%) (%)

(%)
50 38.9 2.1 0.4 1.5
60 66.7 9.7 1.9 3.6
70 94.2 16.9 3.4 5.7
80 122.2 24.5 4.9 7.9

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 At the other extreme if oil prices remain at $80 per barrel for a full year the growth

in the manufacturing sector would slump by 24.5 percentage points, pull down the

GDP by 4.9 percentage points and raise the wholesale prices index by 7.9

percentage points over the current levels.

 The overall impact of the high oil prices on the Indian economy is also restrained by

other factors like the comfortable balance of payments position, the large foreign

exchange reserves and the access to international capital. These parameters have

improved substantially in India’s favor as compared to the previous period of high

oil prices.

 A major limitation of the study is that the analysis has only estimated the direct

impact of high oil prices on output and does not capture the indirect impact

especially its impact on consumption spending and overall demand conditions in the

economy.

 Private consumption spending on transport services was 13.2% of the total private

consumption spending of which 0.6% was for personal transport equipments, 5.2%

was for operation of personal transport equipment and 7.5% was for purchase of

transport services. Growth of private consumption spending on transport services

has grown by an average rate of 7.7% over the last five years.

92
 4.2 Technical Analysis

Crude oil

93
Analysis of Crude Oil:

Part 1: The Moving Averages have been plotted using the 9-day and 18-day closing

prices. The 9-day is indicated by Black line, and the 18-day is indicated by pink line. Here

we can observe that 18-day (pink) is crossing the 9-day (black), it shows a Bearish signal,

so the market is moving downwards. And if 9-day (black) is crossing the 18-day (pink), it

shows a Bullish signal, so the market is moving upwards. Later 18-day (pink) is crossing

9-day (black), so there is a little decrease in the market. Then, 9-day (black) is crossing the

18-day (pink), which shows that market is increasing. Later, 18-day (pink) is crossing the

9-day (black), so in coming days we can’t expect that there is increase or decrease in the

market.

Resistance is equivalent to “supply line”, and support is equivalent to “demand line”. In the

above chart we observe that, the above line shows Resistance and below line shows

Support. Here, both the 18-day and 9-day are crossing the resistance, so resistance

becomes support; it indicates a new willingness to buy or a lack of incentive to sell. The

long blue candlesticks shows the further Close is below the Open, which shows a price

declined significantly from the Close to Open and the seller were Aggressive. The Red

Candlesticks shows further Close is above the Open, which shows a price declined

significantly from the Open to Close and the Buyer were Aggressive. If there is going to be

any fall in the markets, it may fall by the Difference between Resistance and Support

Prices. The Resistance line is above the point 3000 and Support line is near to the point

2750, so we say that it shows a good Resistance and Support lines.

94
Part 2: In the above chart MACD is done by taking the Difference between the 12-day &

26-day EMAs. A 9-day EMAs, called the “signal” (or trigger”) line is plotted on top of

the MACD to show buy/sell opportunities. MACD is indicated by red line and 9-day or

signal line is indicated by black line. Here MACD is below its signal line, so it shows sell

signal. Later, MACD is above its signal line, it shows a buy signal. Then at a certain stage

the MACD and signal line are touching at a same point, so we can’t estimate whether it

indicates buy or sell signal.

Part 3: The RSI is a popular oscillator. It usually tells about the Overbought and

Oversold. If RSI is above 70, it is considered as Overbought. If RSI is below 30, it is

considered as Oversold.

At the initial stage RSI is up to point 55. Later, RSI is decreasing and increasing at a point

50. Then, RSI reaches below 30, it is considered as Oversold. Later RSI shows above 30,

so it is considered as Bullish signal. Later, RSI is about to reach 70 so it shows a bearish

signal. Next, in coming days we can’t expect what is going to happen in the Future whether

it is Overbought or Oversold.

95
 FUTURES CONTRACT

Contract Specification of Crude Oil

Symbol CRUDE OIL
Description CRUDE OIL MMMYY
Trading Period Mondays through Saturdays
Trading Session Monday to Friday:

1st Session: 10:00 am to 11:30 pm

Saturday: 10:00 am to 2:00 pm

No. Of Contracts a year 12
Contract Duration 3 months

Trading
Trading Unit 100 barrels
Price Quote Rs. Per barrel, Ex-Mumbai (excluding all

taxes and levies)

Maximum Order Size 10,000 barrels
Tick Size (minimum price movement) Re. 1
Daily Price Limits 4%
Initial Margin 5%
Special Margin In case of additional volatility, a special

96
 margin as deemed fit, will be imposed

immediately on both buy and sale side in

respect of all outstanding position, which

will remain in force for next 3 days, after

which the special margin will be relaxed.

Maximum Allowable Open Position For individual Clients: 100,000 barrels.

For a member collectively for all clients:

25 % of the open market position.

Delivery
Delivery Unit 50,000 barrels with + / - 2 % tolerance

limit.
Delivery Center (s) Port installation at Mumbai / JNPT Port.

Quality Specifications
Light Sweet Crude Oil confirming to the following quality specification is deliverable:

Sulfur 0.42 % by weight or less,

API Gravity: Between 37 degree – 42 degree.

All volumes are defined at 60 degree Fahrenheit.

NATURAL GAS

97
Introduction of Natural Gas

Natural gas is a fossil fuel, a mixture of hydrocarbon gases largely consisting of

methane, found with petroleum and coal. In its pure form, the gas has no shape, color or

odor and is used in the preparation of organic compounds, cooking food, generating

electricity etc. natural gas is a clean combustible and high-energy emitting gas and

serves as an important fuel to the world as it produces a lesser extent of harmful by

products o burning.

The gases other than methane that join together to form natural gas are ethane, propane,

butane, carbon dioxide, oxygen,nitrogen,helium etc. when all these gases are present in

he natural gas, it is termed as wet natural gas and if al these gases are removed, it is

termed as dry natural gas.

Overview of Natural Gas

Natural gas forms the most cleanest and environment friendly sources of energy. It

does not emit much of the harmful substances that other sources of energy like coal and oil

do. The gas is combustible and that is why it is used in a numerous applications. As

cooking fuel, as a transport fuel, as a lighting fuel, the gas is gaining popularity and is

accepted un each and every aspect of daily life. But there are some precautions to be taken

while working with natural gas as, if the gas is captured or blocked, it may explode.

98
 The total natural gas reserves present in the world figure up to around 6112 trillion

cubic feet. The largest reserves are with Russia with an estimated reserve of 1680

trillion cubic feet. Though maximum reserves are with Russia but unites states

dominates the world production of natural gas with 21% share in the world production

of 115994 billion cubic feet. The dry natural gas production is around 95.2 trillion cubic

feet dominated by Russia. In context of world natural gas consumption, United States

again ranks 1st consuming approximately 22.4 trillion cubic feet in the world total

production of around 95.5 trillion cubic feet, followed by Russia with a consumption

figure of 15.3 trillion cubic feet. With the current rate of consumption the total world

consumption is estimated to increase by a staggering 70% till the year 2025

The list of the major natural gas exporting nations is given below.

 Russia

 Canada

 European union

 Algeria

 Norway

 Netherlands

 Turkmenistan

 Indonesia

The major countries that import natural gas are

 European union

 Unites states of America

 Germany

99
  Japan

 Ukraine

 Italy

 France

 South Korea

 Netherlands

 Belarus

 Spain

Natural gas producing countries

Natural gas is the third most important energy resource after oil and coal. The gas was

formed when the organic particles under the earths crust got transformed with the effect of

constant high temperature and pressure and decomposition by the microorganisms. Like

other fossil fuels that serve as source of energy, natural gas too is a non-renewable type.

That means that the gas once used cannot be recycled for further use and that is why the

natural gas reserves are limited. The total as reserves in the world are estimated to be

around 6112 trillion cubic feet. Though these reserves are present throughout the globe,

most of them are present in the Eurasia region with approximately 42% of the worlds total

reserves, followed by the middle east with 345 share. The countries that possess the

maximum quantity of natural gas along with their reserve level as on January 1, 2006 are

mentioned in the list below

100
  Russia(1680 trillion cubic feet)

 Iran(971 trillion cubic feet)

 Qatar(911 trillion cubic feet)

 Saudi Arabia(241 trillion cubic feet)

 United Arab emirates(214 trillion cubic feet)

 United states of America(193 trillion cubic feet)

 Nigeria(185 trillion cubic feet)

 Algeria(161 trillion cubic feet)

 Venezuela(151 trillion cubic feet)

 Iraq(112 trillion cubic feet)

Though unite states has much lesser natural gas reserves as compared to Russia but still it

leaves Russia behind In context of production. USA contributes to around 21% natural gas

in the worlds total annual produce of 115994 billion cubic feet. The major producers of

natural gas in the world with their average annual production figures are

 Unites states(24119 billion cubic feet)

 Russia(21768 billion cubic feet)

 Canada(7609 billion cubic feet)

 Algeria(5820 billion cubic feet)

 Iran(4556 billion cubic feet)

 Norway (4177 billion cubic feet)

101
  Unites kingdom(3902 billion cubic feet)

 Indonesia(3155 billion cubic feet)

 Netherlands(2576 billion cubic feet)

 Saudi Arabia (2399 billion cubic feet)

The country with the highest dry natural gas production is Russia with 21.8 trillion cubic

feet.

102
 4.3 FUNDAMENTAL ANALYSIS OF NATURAL GAS

Industry Analysis

Production of natural gas in India

India is not a major producer of natural gas. Currently India produces around 31777 million

cubic meters of natural gas annually. At the time of independence in 1947, the production

in the country was negligible but with time the need for introducing natural gas as source of

energy was understood and now natural gas is being preferred in place of other fuels, as it

is an environmental friendly and cost effective fuel. The production the country is in the

hands of both the private and public sector companies, majority of the production being

done off shore. The major companies that are indulged in the production of natural gas in

India are

 Oil and natural gas corporation ltd(ONGC)

 Oil India ltd(OIL)

 Private joint venture companies

Oil India limited (oil) produces the maximum on shore quantity of natural gas in the

country with a production figure of around 2010 million cubic meters. The off shore

production is dominated by oil and natural gas corporation ltd (ONGC) with a production

level of 17444 million cubic meters. State wise, Gujarat is the largest natural gas producing

103
state in India. The list of the major state involved in the production of natural gas is given

below

 Gujarat(3593 million cubic meters)

 Assam/nagaland(2250 million cubic meters)

 Andhra Pradesh(1707 million cubic meters)

 Tamilnadu(678 million cubic meters)

 Tripura (496 million cubic meters)

 Rajasthan(213 million cubic meters)

 Arunachal Pradesh (40 million cubic meters)

Indian natural gas market

Natural gas is relatively a new source of energy to India and does not share a long

background with the country, but currently it is the fastest growing energy source. The gas

is widely accepted in the country now in various appplication, as it possesses various

advantages over the other resources. Due to the pollution level going up in the metropolitan

cities of the country because of the constant industrialization, the state governments have

implied new rules stating the use of compressed natural gas in the public transport vehicles.

Indian natural gas production accounts upto around 31777 million cubic meters. ONGC,

OIL and private joint venture companies undertake the production o the gaseous fuel in the

country. The onshore production level (i.e.8977 million cubic meters) is comparatively

lesser than the production level off shore (i.e.22800 million cubic meters). Gujarat is the

104
largest natural gas producing state in producing around 3593 million cubic meters annually.

The production has risen since 1970s when the Bombay high fields were developed and is

still in the up trend. The main demand for the natural gas in the country arises from the

LPG sector as half of the LPG is produced with the help of natural gas. Natural gas forms

the key component in the growth of the nation as it is needed in the industrial , commercial,

transport and domestic sectors of the country.

As the consumption in the country is rising constantly and the production not enough to

satisfy the domestic demand, India has to import large quantities of natural gas. 22% of the

country’s domestic consumption is fulfilled by the imports. The country imports gas though

various pipelines projects from the countries like

 Iran( IPI pipeline project)

 Myanmar(MBI gas pipeline project)

 Turkmenistan(TAP pipeline)

Market influencing factors

 Demand and supply scenario of OPEC nations

 Fluctuation in the value of the dollar

 Demand level from the importing countries

 Weather condition in the gas producing countries

 Domestic demand from the various sectors of the country

 Government policies and regulations

105
Natural gas has many uses

 It meets 23 percent of U.S. energy requirements.

 It heats 57 percent of U.S. households.

 It accounts for more than 90 percent of new electricity capacity built in last 5 years.

 It cools homes and provides fuel for cooking.

 It provides the energy source or raw material to make a wide range of products,

such as plastics , steel, glass, synthetic fabrics, fertilizer, aspirin, automobiles and

processed food.

The demand for natural gas is growing:

 It is the nation's fastest-growing energy source, with demand forecast to increase by

about 22 percent between now and 2030 (EIA Annual Energy outlook 2006),

including a more than 62 percent increase for electric power generation (EIA

Annual Energy outlook 2006).

 Americans used 21.9 trillion cubic feet in 2005.

 Natural gas supplies about 62 million residential customers and 5 million

commercial and industrial customers.

 Natural gas powers nearly 130,000 buses, taxis, delivery trucks and other natural

gas-powered vehicles.

 Most natural gas used in the United States comes from North America.

106
Supply

 The United States produced 18.2 trillion cubic feet of natural gas in 2005.

 U.S. production has been essentially flat for 20 years; increased imports fill the gap.

Future resources

 Recent estimates by Minerals Management Service and U.S. Geologic Survey for

future undiscovered natural gas resources range as high as 1042 Tcf, enough to last

more than 47 years at current production rates.

 Federal lands contain about 60 percent of the nation's estimated undiscovered

natural gas.

 There are 209 Tcf of technically recoverable natural gas in the Rockies alone -

enough to power more than 50 million homes for 60 years.

 The Rockies' share of the lower-48 production will grow from 23 percent in 2003 to

28 percent in 2030.

 Government policy restricting access and development have placed substantial, new

natural gas supplies "off limits" - approximately 200 Tcf, or enough natural gas to

heat more than 100 million homes for 30 years. Lawsuits block development of

even more.

107
General Characteristics of Natural Gas:

 Natural gas is a colorless, odorless, environment friendly energy source which is

cleanest of all the fuels that is traditionally being used in India.

 Natural gas is a highly flammable hydrocarbon gas consisting chiefly of methane

(CH4). It may also include other gases such as oxygen, hydrogen, nitrogen, ethane,

ethylene, propane, and even some helium

 In India’s energy mix, natural gas is the fastest growing energy source. Its

consumption in India is expected to grow by 10% during 2005-2010. This will be

met by LNG imports as well as domestic gas discoveries.

 Natural gas is used mainly in industrial, commercial, transport and domestic sector.

Power and fertilizer sector are the largest consumers of natural gas.

Distribution of proved reserves in 1985,1995 and 2009

Distribution of proved reserves in 1985

3.30%
10.40% 27.80%
6.20%

7.60%

45%

Middle East Europe & Eurasia Asia Pacific

Africa North Amrica S. & [Link]

108
 Distribution of proved reserves in 1995
5.90% 4.20%
6.90% 31.60%

7.30%

44%

Middle East Europe & Eurasia Asia Pacific

Africa North Amrica S. & [Link]

Distribution of proved reserves in 2005

5.90% 4.20%
40.10%
6.90%

7.30%

36%

Middle East Europe & Eurasia Asia Pacific

Africa North Amrica S. & [Link]

Indian scenario

 Natural gas ecosystem is being dominated by explorers/producers

(ONGC/OIL/JVS), processing cos.(ONGC/GAIL/OIL/IPCL) and transmission,

distribution and marketing (GAIL/GSPL/jvs) entities.

 The Indian energy requirement shall keep pace with expected GDP growth during

the next few decades. Share of natural gas as a primary energy resource is expected

to grow from 8.87% to 22.71% in the overall basket.

109
Share of Natural Gas as a primary commercial source to grow from 9% in 2004 to

23% by 2032

% Share of Primary Commercial Resources (2003-04)

2.14%
8.87% 2%

36.39%
51.07%

Hydro Nuclear Coal Oil Natural Gas

% Share of Primary Commercial Resources (2031-32)

2.36%
6%
22.71%

44.76%
23.86%

Hydro Nuclear Coal Oil Natural Gas

 Current import f natural gas is around 22% of the domestic consumption. This is

likely to grow to 33% by 2010-11

 While there is a decline in gas availability from the existing resources, there have

been several large discoveries f gas reserves by [Link]/JVs/PSUs which would

contribute significantly to gas availability in India.

110
  The supply of gas from Pvt Sector which is currently at 27% is expected to increase

to 64% by 2010-11

 Current trends (recent LNG import) in the industry demonstrate convergence of

India prices to the international level. This may continue with Govt. policy to

integrate hydrocarbon sector with the international market.

Indian Demand & Supply Scenario

 NG supplies are expected to increase by 143% over the next five years. This

increase is as a result of new gas discoveries coming into production and various

LNG projects getting commissioned/expanded.

 The transnational pipelines are being planned and pursued with great vigor by

companies like GAIL, Reliance etc. This will result in better flow of gas to the

deficit regions in the country

Demand-Supply Gap

120
100
Bn. Cu. Mtrs

80
60
40
20
0
2004-05 2005-06 2006-07 2007-08 2008-09
Year

Demand Supply

111
  Total demand is expected to increase to 110 BCM by 2010

 New source of gaseous fuel will be opened up like coal bed methane, underground

coal gasification, etc.,

 The latent demand of gas is estimated to be twice the supply.

Factors influencing demand and supply of natural gas

 OPEC output and supply

 Geo-politics

 Dollar fluctuation

 US natural gas inventory data

 Global demand particularly from emerging nations

 Weather conditions

 NELP policy by government of India

 Demand from power and fertilizer sectors

Domestic Scenario

Natural gas is the fastest growing energy source in India’s energy mix. Its consumption in

India is expected to grow by 10% p.a. during 2005-2010. India stands fifth in terms of

consumption of natural gas.

Production of natural gas, which was almost negligible at the time of independence, is

around 87 million standard cubic meters per day (MMSCMD) at present. The natural gas

ecosystem in India is dominated by public sector explorers/producers (ONGC/OIL),

112
processing cos.(ONGC/GAIL/OIL/IPCL) and transmission, distribution and marketing

(GAIL/GSPL) entities. The Indian energy requirement has to keep pace with the expected

growth in GDP during the next few decades. The share of natural gas as a primary energy

resource is expected to grow from 9% to 23 % by 2031-32

India currently imports 22% of the domestic gas consumption, which is likely to grow to

33% by 2010-11. Private sector supplies meet 27% of domestic requirement and are

expected to increase to 64% by 2010-11. To meet the rapid increase in demand various

trans-national projects like iran-pakistan-india (IPI) pipeline project and Myanmar-

Bangladesh India gas pipeline project ate being planned .overall, natural gas supplies are

expected to increase by a staggering 143 % over the next five years with the

implementations of these projects and new gas discoveries in the country.

With India importing over 70% of its oil requirements through imports and given the high

crude oil prices and price volatility, it is increasingly importance for the nation to keep a

close watch on alternate sources of energy i.e., natural gas which are cheaper, less

damaging to the environments and technologically feasible.

113
 120
100 97
100 85
82

Bn. Cu. Mtrs

80 72
58 61 58
60
35
40 30
20
0
2004-05 2005-06 2006-07 2007-08 2008-09
Year

Demand Supply

Share of Natural Gas

The demand and supply of Natural Gas for India in the near Future is depicted in the below

chart

% Share of primary Commercial Resources (2003-04)

9% 2% 2%

36%
51%

Hydro Nuclear Coal Oil Natural Gas

114
Natural Gas Demand:

Natural gas is believed by many to be the most important energy source for the future. The

abundance of natural gas, worldwide as well as domestically, coupled with its

environmental soundness and multiple applications across all sectors, means that natural

gas will continue to play an increasingly important role in meeting demand for energy in

the United States. This section will address factors that affect the demand for natural gas in

the United States, including those trends that are expected to provide for steadily increasing

demand for natural gas for the foreseeable future and the long term and short term factors

that affect the demand for natural gas

Factors Affecting Short Term Demand for Natural Gas

Demand for natural gas has traditionally been highly cyclical. Demand for natural gas

depends highly on the time of year, and changes from season to season. In the past, the

cyclical nature of natural gas demand has been relatively straightforward: demand was

highest during the coldest months of winter and lowest during the warmest months of

summer. The primary driver for this primary cycle of natural gas demand is the need for

residential and commercial heating. As expected, heating requirements are highest during

the coldest months and lowest during the warmest months. This has resulted in demand for

natural gas spiking in January and February, and dipping during the months of July and

August. Base-load storage capacity is designed to meet this cyclical demand: base-load

storage withdrawals typically take place in the winter months (to meet increased demand),

while storage injection typically takes place in the summer months.

115
Factors Affecting Long Term Demand for Natural Gas

While short term factors can significantly affect the demand for natural gas, it is the long

term demand factors that reflect the basic trends for natural gas use into the future. In order

to analyze those factors that affect the long term demand for natural gas, it is most

beneficial to examine natural gas demand by sector. However, it is useful to have an

understanding of what natural gas is used for in each of these sectors beforehand.

The analysis of factors that affect long term demand across all sectors are complicated. The

actual demand for any source of energy relies on a variety of interrelated factors, and it is

very difficult to predict how these factors will combine to shape overall demand. To learn

more about the prospects for natural gas and energy demand in the long term

Factors Affecting the Supply of Natural Gas

The production of natural gas in the United States is based on competitive market forces:

inadequate supply at any one time leads to price increases, which signal to production

companies the need to increase the supply of natural gas to the market. Supplying natural

gas in the United States in order to meet this demand, however, is dependent on a number

of factors. These factors may be broken down into two segments: general barriers to

increasing supply, and those factors that affect the short term supply scenario.

Domestic Natural Gas Production

According to the EIA, 19.05 Trillion cubic feet (Tcf) of dry natural gas was produced in the

United States in 2002. This represents over 84 percent of total domestic consumption. This

116
compares to crude oil, where only about 39 percent of consumption is met by domestic

production. The United States is much less reliant on other countries for its natural gas

supply than it is for its supplies of crude oil. Many believe that natural gas is a much more

reliable source of energy, considering such a high proportion of domestic demand is met by

domestic production.

Percent of domestic production by state

Exchanges trading in natural gas

 New York mercantile exchange(NYMEX)

 International petroleum exchange of London(IPE)

 MCX (multi commodity exchange of India Ltd..)

Natural gas units

 1mmbtu(million British thermal units) = 25.2 SCM

 1 SCM = 1 cubic meter@ 1 atmosphere pr & 15 degree temp

 1 TCF = 4 MMSCMD

117
  1 MMTPA of LNG=4MMSCMD

 1BCM=2.8 MMSCMD

 1 MT of LNG = 1300 SCM

Natural gas futures

Futures contracts are legally binding agreements to buy or sell natural gas at an agreed

price with standardized quantity and on a set date. Futures are typically used for price

discovery to hedge physical market position. Long hedge strategy is used to hedge against a

natural gas price increase by buying futures, whereas a short hedge will protect against risk

of a price fall by selling futures at the exchange.

Leading exchange dealing in natural gas futures

 New York mercantile exchange (NYMEX)

Benefits of natural gas futures at MCX

 Price Discovery

 Hedging against Price Risk

 Wider Market Participation

 Free, Fair and Transparent Trade

 Price Risk Management

 Global Price convergence

 Real market commodity prices

118
 Economic Analysis of Natural Gas:

 India ranks sixth in the worlds in terms of energy demand accounting for 3.5

percent of world primary energy demand.

 1 with 8 percent Gross Domestic Product (GDP) growth target set by the Planning

Commission of India through its Tenth Five Year Plan (2000-07), the energy

demand is expected to grow at 4.8 percent.

 Although, the commercial energy consumption has growth rapidly over the last two

decades, a large part of India’s population does not have access to commercial

energy.

 The per capita energy consumption is a low 305 kilogram of Oil Equivalent as

compared to the world’s average of 1,487kg.

 The average annual world economic growth in 1997-2020 period is projected at 3.2

percent while the energy growth rate is estimated at 2.1 percent per annum.

 This yields an elasticity of energy consumption at about 66 percent. In India’s case,

the elasticity was more than unity for 1953 to 2001 period.

 However, the elasticity for primary commercial energy consumption for 1991-2000

period is less than utility. This could be attributed to several factors, such as, the

improvement in efficiency of energy use and the consequent lowering of the overall

energy intensity of the economy and the higher share of hydrocarbons in the overall

energy mix.

119
 The projected annual requirement of commercial energy is estimated at about 406

million tones Oil Equivalent (Mtoe) and 554 Mtoe by 2006-07 and 2011-12,

respectively.

 The Demand for Natural Gas in India is 1.5 times the current level of domestic

production. GAIL, with around 4400 Km of pipelines, accounts for Distribution of

more than 90 % of Natural Gas produced.

 Demand for gas is expected to rise at a CAGR of more than 5 % during 2000 to

2025. The share of Natural Gas in India’s energy mix has increased from 2.5 % in

1980s to more than 7 % now.

120
 4.4 Technical Analysis

Natural Gas

Analysis of Natural Gas

Part 1: The Moving Averages have been plotted using the 9-day and 18-day closing

prices. The 9-day is indicated by Black line, and the 18-day is indicated by pink line. In the

initial stage there is an increase in the market. Later we can observe that 18-day is crossing

the 9-day, it shows a Bearish signal, and so the market is moving downwards to some

extent. Then 9-day (black) is crossing the 18-day, it shows a Bullish signal, so the market

is moving upwards. Later 18-day is crossing 9-day, so there is a decrease in the market.

Then, 9-day is crossing the 18-day, which shows that market is increasing. Later, 18-day

121
(pink) is crossing the 9-day (black), so in coming days we can’t expect that there is

increase or decrease in the market.

Resistance is equivalent to “supply line”, and support is equivalent to “demand line”. In the

above chart we observe that, the above line shows Resistance and below line shows

Support. . The long blue candlesticks shows the further Close is below the Open, which

shows a price declined significantly from the Close to Open and the seller were Aggressive.

The Red Candlesticks shows further Close is above the Open, which shows a price

declined significantly from the Open to Close and the Buyer were Aggressive. If there is

going to be any fall in the markets, it may fall by the Difference between Resistance and

Support Prices. The Resistance line is at the point 345 and Support line is at the point 312,

so we say that it shows a good Resistance and Support lines.

Part 2: In the above chart MACD is done by taking the Difference between the 12-day &

26-day EMAs. A 9-day EMAs, called the “signal” (or trigger”) line is plotted on top of

the MACD to show buy/sell opportunities. MACD is indicated by red line and 9-day or

signal line is indicated by black line. Here MACD is above its signal line, so it shows buy

signal. Later, MACD is below its signal line, it shows a sell signal. Then at a certain stage

the MACD and signal line are touching at a same point, so we can’t estimate whether it

indicates buy or sell signal. Later MACD is below the signal line, which means it shows a

sell signal

122
Part 3: The RSI is a popular oscillator. It usually tells about the Overbought and Oversold.

If RSI is above 70, it is considered as Overbought. If RSI is below 30, it is considered as

Oversold.

Here RSI is neither below 30 nor above 70, so can’t we expect that it is Oversold or

Overbought. It is in a stagnant form.

123
 FUTURES CONTRACT

Contract Specifications of Natural Gas

Symbol NATURAL GAS
Description NATURAL GAS MMMYY
No. of Contracts a year 12
Contract duration 3 months

Trading
Trading Period Mondays through Saturdays
Trading Session Monday to Friday:

10:00 am to 11:55 pm

Saturday: 10:00 am to 2:00 pm

Trading Unit 500 mmBtu
Quotation / Base Value Ex- Hazira exclusive of all taxes, levies

and other expenses

Tick Size (minimum price movement) 10 paise (0.10 rupees)
Daily Price Limits 4%
Price Quote Rs. Per mmBtu
Maximum Order Size 20,000 mmBtu
Initial margin 7%
Special Margin In case of additional volatility, a special

margin at such percentage, as deemed

fit, will be imposed immediately on

both buy and sale side in respect of all

outstanding position, which will remain

in force for next 2 days, after which the

special margin will be relaxed.

Maximum Allowable Open Position Client level: 50,00,000 mmBtu

Member level: 2,00,00,000 mmBtu or

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 20 % 0f the open market position,

which ever is higher.

Delivery
Delivery Unit 10000 mmBtu
Delivery Center Hazira Hub

Quality Specifications
Should be of Standard Pipeline quality. Quality of gas bought or sold under any

contract will be delivered at uniform hourly rate (with maximum of 10 %

variation) during the period of 8 hours covered under the contract.

CHAPTER-7

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 FINDINGS AND
SUGGESTIONS

FINDINGS

 Natural gas prices seems bearish and would likely fall Rs180 to Ras200 [Link]

may break the trend line of the wedge formation.

 Crudeoil prices is sideways for the next couple of days due to demand is moderate

and recession effect on dollar.

 Crudeoil prices may trade around $88 to $90 in international market and in india it

may trade around 3700 to 3800 levels for the next couple of months

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 SUGGESTIONS

 Commodity Market, contrary to the beliefs of many people has been in existence in

India through the ages.

 Commodity includes all kinds of goods. FCRA defines “goods” as “every kind of

movable property other than actionable claims, money and securities”.

 Price movements are purely based on demand and supply of that commodity.

 Trading session of Crude Oil is from Monday to Friday, 1 st session 10:00A.M to

11:30 P.M, and Saturday 10:00 A.M to 2:00 P.M.

 Trading session of Natural Gas is from Monday to Friday, 1 st session 10 -00A.M to

11:55 P.M, and Saturday 10:00 A.M to 2:00 P.M.

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 CHAPTER-8

CONCLUSION

Conclusions:

 Only Futures contracts are available for Crude Oil and Natural Gas.

 The share of GDP of crude oil was only 28.7 % while 71.3 % were imports. And the

total crude oil production in 2003-04 was 33 million tons, while imports were as

high as 90 million tons.

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 The share of natural gas in India’s energy mix has increased from 2.5 % in 1980s to

more than 7 % now. The demand for natural gas in India is 1.5 times the current

levels of domestic production. Demand for gas is expected to rise at CAGR of more

than 5 % during 2000 to 2025.

 Technical analysis for both the products using Moving averages, Resistance and

Support, MACD (Moving Average and Converse Diversion), RSI (Relative

Strength Index).

 In analysis, we can’t say that how the prices are fluctuating in coming 3-days.

CHAPTER-9
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 BIBLIOGRAPHY

BIBLIOGRAPHY

BOOKS:

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Fisher and Jordon Security analysis and portfolio management

WEB SITES:

[Link]

[Link]

[Link]

[Link]

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