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Indian Oil Minister Mani Shankar Aiyar told a regional energy conference that India, which has a vital interest in stable oil markets as it sources 70 percent of its crude oil needs abroad, should allow for derivatives trading keeping a check on oil price fluctuations and hedge risk.

Weather Derivative: Prospects

The emergence of the wholesale power market in response to the deregulation of the Power Industry and changed role of utility has helped weather derivative market to develop and stabilise volatility in revenue and expenses, caused by unpredictability of weather conditions. Unofficially, the OTC weather derivative market began in 1996 when Entergy-Koch and Enron completed a HDD swap for the winter of 1997 in Milwaukee, WI. According to a Price Waterhouse Survey, this is estimated at $12 billion by the end of this year.

In an agrarian economy like India, where Fifty per cent of irrigation is rain-fed and monsoons determine rural demand patterns, fertilizer off take, agricultural commodity prices, water utilities, energy consumption and construction costs, Weather derivatives can aptly be positioned as hedging instruments for farmers. These prospects in Weather risk management will also benefit the Utility and energy companies to protect their volume-related revenues against unnatural weather, Distributors of crude oil to make up for reduced business in the winter, Agricultural companies to minimise the uncertainty in revenue due to flood, freeze or drought and also Insurance companies to reduce their own exposure to weather-related claims.

In India, RaboBank and ABN Amro have been the first off the block to introduce weather derivatives help manage weather risk, which has now expanded to include end user industries such as beverage sales, agriculture, power generation, oil exploration, tourism, insurance, cold drink breweries, wind farms and sugar industries.

As a start (January 11, 2005), with all the necessary infrastructure to offer deliveries through dematerialized warehouse receipts by linking up with panchayats and anticipating a strong demand, NCDEX is in favour of launching this product. More demand can be generated by an amendment of the existing Securities Contract (Regulation) Act, where derivative trading is allowed in a commodity, which can be physically delivered.

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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.