Commodity Market in India

Oil vs Gold vs Stock Market

By
Dhruv Bahl(16005) Resham Dang (15951) Sunaina Kain (16004)

Acknowledgement
We extend our sincere gratitude and thanks to Dr. Kumar Bijoy for his guidance while making this project

Content

Commodity Market
Definition A commodities exchange is an exchange where various commodities and derivatives products are traded. Commodities, which are hard goods, as opposed to services, may be bought and sold on a commodity exchange in three types of markets: cash, futures and options. A commodity exchange is considered to be essentially public because anybody may trade through its member firms. The commodity exchange itself regulates the trading practices of its members while prices on a commodity exchange are determined by supply and demand. A commodity exchange provides the rules, procedures, and physical for commodity trading, oversees trading practices, and gathers and disseminates marketplace information. Commodity exchange transactions take place on the commodity exchange floor, in what is called a pit, and must be affected within certain time limits. Floor traders, floor brokers and futures commissions merchants working on the floor of a commodity exchange must be registered. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them. These contracts can include spot prices, forwards, futures and options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts. Modern commodity markets began with the trading of agricultural products, such as corn, cattle, wheat and pigs in the 19th century. Modern commodity markets trade many types of investment vehicles, and are often utilized by various investors from commodity producers to investment speculators. For example, a corn producer could purchase corn futures on a commodity exchange to lock in a price for a sale of a specified amount of corn at a future date, while at the same time a speculator could buy and sell corn futures with the hope of profiting from future changes in corn prices. In the original and simplified sense, commodities were things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer were considered equivalent. On a commodity exchange, it is the underlying standard stated in the contract that defines the commodity, not any quality inherent in a specific producer's product. Generally, membership on an exchange is individual, and only members may buy and sell futures and options on the exchange trading floor. Administration of the day-to-day operations of the exchange is handled by a paid staff. Members make the ultimate decisions, however, first by committee approval, then by passage by the board of directors or board of trustees. Administrative decisions are subject to full membership vote.

The heart of the exchange is the exchange trading floor, where a specific area, known as a pit or ring, is designated for the trading of each commodity. Bids (propositions to buy a specific quantity of a commodity at a stated price) and offers (propositions to sell a specific quantity of a commodity at a stated price) are made by open outcry. As each transaction is completed in the pit, a pit reporter records it; this information is immediately displayed on the trading floor quotation board and also appears on computer screens in brokerage offices and trading centers worldwide. Each trade is also recorded by the participating member on trading cards; each entry shows the amount bought or sold, with whom the trade was made, the price, and the trading bracket (time period) in which the trade was made. These cards enable each member to recheck his trades, as every trade must be resolved before the start of trading the following day. The seller of a futures contract on a commodity exchange does not normally intend to deliver the actual commodity, nor does the buyer intend to accept delivery; each will, at some time prior to the date of delivery specified in the contract, cancel out his obligation by an offsetting purchase or sale. The parties merely wish to engage in the assumption or delegation of the risk involved in a change in price. Commodity trading is the market activity, which links the producers of the commodities effectively with their commercial consumers. Commodity trading mainly takes place in the commodity markets where raw or primary products are usually exchanged. The raw commodities here are traded on regulated commodities exchanges, in which they are bought and sold in standardized forms of contracts. Commodity market is one of a few investment areas where an individual with limited capital can make extraordinary profits in a relatively short period. Nevertheless, because most people lose money, commodity trading has had a bad reputation, as being too risky for the average individual. Commodity trading is buying and selling of futures and the future options. The truth is that commodity trading is only as risky as one wants to make it. A Federal act regulates the futures and options industries, requiring all futures and options to be traded on organized exchanges. Commodity Exchange Act, USA is a federal act passed in 1936 by the U.S. Government (replacing the Grain Futures Act of 1922). bThe Act provides federal regulation of all commodities and futures trading activities and requires all futures and commodity options to be traded on organized exchanges. The Commodity Futures Trading Commission (CFTC) was created in 1974 as a result of the Commodity Exchange Act, which in 1982 created the National Futures Association (NFA).

History of Commodity Market in India

The history of organized commodity derivatives in India goes back to the nineteenth century when Cotton Trade Association started futures trading in 1875, about a decade after they started in Chicago. Over the time datives market developed in several commodities in India. Following Cotton, derivatives trading started in oilseed in Bombay (1900), raw jute and jute goods in Calcutta (1912), Wheat in Hapur (1913) and Bullion in Bombay (1920). However many feared that derivatives fuelled unnecessary speculation and were detrimental to the healthy functioning of the market for the underlying commodities, resulting in to banning of commodity options trading and cash settlement of commodities futures after independence in 1952. The parliament passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts in Commodities all over the India. The act prohibited options trading in Goods along with cash settlement of forward trades, rendering a crushing blow to the commodity derivatives market. Under the act only those associations/exchanges, which are granted reorganization from the Government, are allowed to organize forward trading in regulated commodities. The act envisages three tire regulations: (i) Exchange which organizes forward trading in commodities can regulate trading on day-to-day basis; (ii) Forward Markets Commission provides regulatory oversight under the powers delegated to it by the central Government. (iii) The Central Government- Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution- is the ultimate regulatory authority. The commodities future market remained dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in a policy, started actively encouraging commodity market. After Liberalization and Globalization in 1990, the Government set up a committee (1993) to examine the role of futures trading. The Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17 commodity groups. It also recommended strengthening Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing option trading in goods and registration of brokers with Forward Markets Commission

Commodity Exchanges in India

There are primarily 3 exchanges in India 1. MCX- Multi Commodity Exchange of India 2. NCDEX- National Commodity Derivatives Exchange of India 3. NMCE- National Multi Commodity Exchange of India The following table gives us an overview of the commodity exchanges around the world Africa
Exchange Abbreviation Location Product Types

Ethiopia Commodity Exchange

ECX

Addis Ababa, Ethiopia

Agricultural

Africa Mercantile Exchange

AfMX

Nairobi, Kenya

Agricultural,equities and energy products

Americas
Exchange Abbreviation Location Product Types

Brazilian Mercantile and Futures Exchange

BMF

So Paulo, Brazil

Agricultural, Biofuels, Precious Metals

Chicago Board of Trade (CME Group)

CBOT

Chicago, US

Grains, Ethanol, Treasuries, Equity Index, Metals

Chicago Mercantile Exchange (CME Group)

CME

Chicago, US

Meats, Currencies, Eurodollars, Equity Index

Chicago Climate Exchange

CCX

Chicago, US

Emissions

Hedge Street Exchange

California, US

Energy, industrial Metals

Intercontinental Exchange

ICE

Atlanta,

Energy, Emissions,

Georgia, US

Agricultural, Biofuels

Integrated Nano-Science Commodity Exchange

INSCX

United Kingdom

Engineered nanomaterials

Kansas City Board of Trade

KCBT

Kansas City, US

Agricultural

Memphis Cotton Exchange

Memphis, US

Agricultural

Mercado a Termino de Buenos Aires

MATba

Buenos Aires, Argentina

Agricultural

Minneapolis Grain Exchange MGEX

Minneapolis

Agricultural

New York Mercantile Exchange (CME Group)

NYMEX

New York, US

Energy, Precious Metals, Industrial Metals

U.S. Futures Exchange

USFE

Chicago, US

Energy

Asia
Exchange Abbreviation Location Product Types

Bursa Malaysia

MDEX

Malaysia

Biofuels

Cambodian Mercantile Exchange

CMEX

Phnom Penh, Cambodia

Energy, Industrial Metals, Rubber, Precious Metals, Agri Commodities.

Central Japan Commodity Exchange

Nagoya, Japan

Energy, Industrial Metals, Rubber

Dalian Commodity Exchange

DCE

Dalian, China

Agricultural, Plastics, Energy, Industrial Metals, Bullions, Agri Commodities

Dubai Mercantile Exchange

DME

Dubai

Energy

Dubai Gold & Commodities Exchange

DGCX

Dubai

Precious Metals

Hong Kong Mercantile Exchange

HKMEx

Hong Kong

Gold

Iranian oil bourse

IOB

Kish Island,Iran

Oil, Gas, Petrochemicals

Kansai Commodities Exchange

KANEX

Osaka,Japan

Agricultural

Commodities & Metal Exchange COMEN Nepal Ltd.

Nepal

Gold and Silver

Nepal Derivative Exchange [NDEX] Limited

Kathmandu,Nepal

Agricultural, Precious Metals, Base Metals, Energy

Mercantile Exchange Nepal MEX Limited

Kathmandu,Nepal

Agricultural, Bullion, Base Metals, Energy

Nepal Spot Exchange Limited

NSE

Kathmandu,Nepal Agricultural, Bullion

Indian Commodity Exchange Limited

ICEX

India

Energy, Precious Metals, Base Metals, Agricultural

Multi Commodity Exchange

MCX

India

Precious Metals, Metals, Energy, Agricultural Products

National MultiCommodity Exchange of India Ltd

NMCE

India

Precious Metals, Metals, Agricultural

National Commodity Exchange Limited

NCEL

Pakistan

Precious Metals, Agriculture

Bhatinda Om & Oil Exchange Ltd.

BOOE

India

Agricultural

Karachi

Precious Metals, Agricultural

National Commodity and NCDEX Derivatives Exchange

Mumbai

All

Shanghai Futures Exchange

Shanghai

Industrial metals, Fuel Oil, Rubber

Singapore Commodity Exchange

SICOM

Singapore

Agricultural, Rubber

Singapore Mercantile Exchange

SMX

Singapore

Futures & Options contracts in Precious Metals such as physicallydelivered Gold, Base Metals, Agriculture Commodities, Energy such as WTI and Brent denominated in Euro, Currencies such as Euro-US

Dollar Contract, Commodity Indices

Tokyo Commodity Exchange

TOCOM

Tokyo,Japan

Energy, Precious Metals, Industrial Metals, Agricultural

Tokyo Grain Exchange

TGE

Tokyo,Japan

Agricultural

Zhengzhou Commodity Exchange Europe

CZCE

Zhengzhou,China

Agricultural

Exchange

Abbreviation

Location

Product Types

APX-ENDEX

APX-ENDEX

Amsterdam, the Netherlands

Energy

Commodity Exchange Bratislava, JSC

CEB

Bratislava, Slovakia

Emissions, Agricultural

Climex

CLIMEX

Amsterdam, the Netherlands

Emissions

NYSE Liffe

Europe

Agricultural

European Climate Exchange

ECX

Europe

Emissions

Energy Exchange Austria

EXAA

Vienna, Austria

Electricity, Emission Allowances

London Metal Exchange

LME

London, UK

Industrial Metals, Plastics

Risk Management Exchange

RMX

Hannover, Deutschland

Agricultural

European Energy Exchange EEX

Leipzig, Germany

Energy, Emissions

Oceania Exchange Abbreviation Location Product Types

Australian Securities Exchange

ASX

Sydney, Australia

Agricultural, Electricity, Thermal Coal & Natural Gas

Guidelines for Grant Of Recognition To New National Commodity Exchange Under The Provisions Of The Forward Contracts (Regulation) Act, 1952.

1. Forward trading in commodities is regulated under the provisions of the Forward Contracts (Regulation) Act, 1952 (hereinafter referred as FCR Act). The Associations / companies organizing such trading are required to obtain recognition from the Government of India under the FCR Act. At present, there are 22 recognized Commodity Exchanges including 3 National Multi Commodity Exchanges (NMCEs). 2. The volumes of trades in the commodities derivative market has increased manifold after setting up of electronic Exchanges with national status. 3. Grant of recognition to new National Commodity Exchanges was done within the framework of Press Note issued on 8th March 2002. Three National Exchanges came into existence in late 2003 through this process. The Commodity Futures Markets have grown substantially since then. There is a renewed interest in establishing new National Commodity Exchanges. The question of formulation of a framework governing establishment of National Commodity Exchanges was under consideration of Government for some time past. Accordingly, the Government hereby lays down the revised guidelines for making an application for setting up of a nation-wide multi-commodity Exchange in future, as under:

Revised Guidelines
4. A two stage process will be followed for granting recognition to a new Exchange.

First Stage

5. In the first stage, applications for setting up of a Nation-wide Multi Commodity Exchange may be submitted by reputed associations / companies / organizations or consortium of such entities to the Government through the Forward Markets Commission (hereinafter referred to as the Commission), the commodity futures market regulator. The Government, on being satisfied that it would be in the interest of trade and also in the public interest to do so, may grant in principle approval for setting up of a National Multi Commodity Exchange. In-principle approval may be granted to the applicant who fulfills the following criteria: 5.1. The proposed Exchange, sponsored/promoted by Associations/companies/organizations or a consortium of such entities should be registered as a public limited company incorporated under the Companies Act, 1956 with a minimum authorized equity capital of Rs. 100 crore. 5.2. The proposed Exchange shall have a demutualised structure, i.e., the share holders of the Exchange shall not have any trading interest either as a trading member or client at the Exchange. 5.3. While applying for in-principle approval, the proposed equity Shareholding pattern of the Exchange should be as under a) One or more of the initial partners/members of the b) Promoter consortium must be a Government Company/ Companies, as defined in the Companies Act 1956, contributing at least 26 % of the paid up equity capital of the proposed Exchange. b) The Share holding of institutional investors as defined below shall not be less than 20% with a minimum of 10% from category (ii). (i) Stock / Commodity Exchanges, Banks and public financial institutions; (ii) Government Companies as defined in the Companies Act, 1956, Co-operative Societies as defined in the Societies Act, Federations manufacturing or marketing agri-inputs or marketing agri-produce or owning and operating warehouses. c) No individual shall hold more than 1% of the paid up equity capital of the Exchange and the total of such individual holdings shall not exceed 25% of the paid up capital. d) Subject to the shareholding limits prescribed herein before, no single shareholder either individually or together with persons acting in concert with it shall be allowed to hold more than 40% of the paid up equity capital of the proposed Exchange. e) Investment in the initial paid up capital by shareholders shall be subject to a lock-in period of three years from the date of recognition of the Exchange. However, in exceptional cases the period can be relaxed by up to one year by the Forward Markets Commission. f) (i) Any investor having shareholding in excess of 26% has to bring it down to 26% or below within two years beginning with the 4th year from the date of recognition of the Exchange. (ii) After the expiry of the period as specified at (i), it will be obligatory on the investors to align the shareholding pattern, as per the guidelines notified by the Government from time to time.

5.4. The Exchange shall ensure complete separation of ownership and management. It shall have a Professional management headed by a Chief Executive Officer. The appointment, renewal and removal of the CEO shall be done in the manner as prescribed by the Commission. 5.5. The promoters of the proposed Exchange shall submit a formal agreement amongst themselves on issues related to the setting up of the Exchange and written commitment for equity investment from promoters/ investors, including institutional investors. The formal agreement shall, inter-alia, contain the extent of equity investment from each of the investors, equity holding in the short and long term in the authorized and paid up capital of the Exchange, main place of business and registered office, etc. 5.6. Each of the promoters of the proposed Exchange must be a fit and proper person 6. Submission of proposal 6.1. The detailed proposal should be sent to the Chairman, Forward Markets Commission, Government of India, Everest, 3rd Floor, 100, Marine Drive, Mumbai- 400 002, along with: a) A non-refundable processing fee of Rs.5,00,000/- (Rupees Five Lakh only) in the form of crossed demand draft issued by any nationalized bank in favour of Forward Markets Commission,payable at Mumbai. Applications without the processing fee shall not be entertained by FMC; b) Details of the present business of each of the promoters/ constituents; c) Net worth of each of the promoters / constituents; d) Audited accounts of each of the promoters / constituents for the last 3 years; e) Business plan for the proposed Exchange and schedule for operationalisation of the Exchange from the date of in-principle approval; f) Proposed capital expenditure and sources of funds; g) Clear confirmation of the location of the registered office and main place of business of the proposed Exchange; h) Affidavit by the authorized signatory of each of the promoters of the Exchange affirming that they dont attract the disqualifications. 6.2. The proposal should be submitted in the form of a comprehensive Project Report giving, inter-alia, justification for setting up a new exchange, details of the management structure, investment plan, business plan, system of trading, clearing and settlement (including settlement guarantee), customer protection, details of infrastructure for handling physical delivery including the warehousing and assaying arrangements along with the strategy for implementation thereof. However, FMC may seek other details, as it may deem appropriate. 7. Government may grant in-principle approval after taking into account the recommendations of the Commission.

8. An applicant granted in-principle approval shall be required to submit to the FMC a bank guarantee of Rs 50,00,000 (Rupees Fifty Lakh only) issued by a nationalized bank with a validity period of 21 months and a further claim period of 3 months and drawn in favour of Director, Forward Markets Commission, Mumbai, within fifteen days of grant of inprinciple approval for setting up the Exchange.

Second Stage
9. In the second stage, the applicant who has been granted inprinciple approval will have to comply with the following conditions within a period of one year from the date of grant of in-principle approval. The Exchange shall: (i) Bring paid up capital of at least Rs 100 crore as per the proposed equity capital structure subject to the guidelines of para 5.2; (ii) Set up facilities for online trading with national reach and an efficient real time monitoring and surveillance system; (iii) Provide for an efficient clearing and settlement system including establishment of a Settlement Guarantee Fund; (iv) Arrange for an efficient delivery mechanism through an adequate network of accredited warehouses; (v) Have an independent and professional management; (vi) Provide for adequate infrastructure for dissemination of real time price and trade information; (vii) Provide for adequate infrastructure for research and development on commodities, contracts anddevelopment of trade; (viii) Submit draft rules, regulations and bye-laws for conduct of business for in-principle approval of the Commission; (ix) Plan for a network of well organized and capitalized brokerage houses as members and other intermediaries. However, no membership subscription or deposit of any nature shall be collected before grant of recognition to the Exchange. No shareholder shall be allowed to be a trading member of the Exchange. (x) Provide for efficient and effective grievance redressal mechanism. 10.1 In case of failure to fulfill the above laid down conditions within the stipulated time, the Government reserves the right to revoke the in principle approval so granted without assigning further reasons. Extension beyond the stipulated period may be granted only in exceptional cases on genuine grounds but not exceeding three months. 10.2 In the event of the applicant failing to establish the Exchange within the stipulated period of time or extended period of time, as the case may be the bank guarantee shall be invoked and the amount shall be forfeited.

11. The Government, on satisfactory fulfillment of the condition stipulated and after taking into account the recommendations of the Commission in this regard, may grant recognition to the proposed Exchange. 12. The Government / FMC reserves the right to prescribe any other condition if it deems fit for orderly developments of the market and reject an application at any stage without assigning any reasons.

Process followed in the Commodities Exchange

Open Outcry Method

Operating during regular trading hours (RTH), the open outcry method consists of floor traders standing in a trading pit to call out orders, prices, and quantities of a particular commodity. Different colored jackets are worn by the traders to indicate their function on the floor (traders, runners, CME employees, etc.). In addition, complex hand signals (called Arb) are used. These hand signals were first used in the 1970s. The pits are areas of the floor that are lowered to facilitate communication, sort of like a miniature amphitheater. The pits can be raised and lowered depending on trading volume. To an onlooker, the open outcry system can look chaotic and confusing, but in reality the system is a tried and true method of accurate and efficient trading. An illustrated project to record the hand signal language of the CME trading pits has been compiled. Open outcry exchange trading is the original style of trading that stock and commodities used to use. Today it is a much smaller segment of total market trading but still very important. In open outcry exchanges the method of communication between traders involves shouting and the use of hand signals to transfer information primarily about buy and sell orders. The part of the trading floor where this takes place is called a pit. Examples of markets, which still utilize this type of system, are the New York Mercantile Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade, and the Chicago Board of Options Exchange. The open outcry system is being replaced all over the world by electronic trading systems. Proponents of electronic trading make the claim that they are faster, cheaper, more efficient for users, and less prone to manipulation by market makers and broker/dealers. On the other hand, many traders still back the open outcry system on the basis that the physical contact allows traders to speculate as to a buyer/seller's motives or intentions and adjust their positions accordingly. Floor hand signals are used to communicate buy and sell information in open outcry exchanges. Traders typically flash signals across a room to make a sale or a purchase. Signals that occur with palms facing out and hands away from the body are an indication the

gesturer wishes to sell. When traders face their palms in and hold their hands up, they are gesturing to buy. Numbers one through five are gestured on one hand, and six through ten are gestured in the same way only held sideways at a 90-degree angle (index finger out sideways is six, two fingers is seven, and so on). Numbers gestured from the forehead are blocks of ten, and blocks of hundreds and thousands can also be displayed. The signals can otherwise be used to indicate months, specific trade or option combinations, or additional market information. Over a century ago, the Chicago Butter and Egg Board was founded with two contracts on butter and eggs. Since then it has evolved into what we now know it as, the Chicago Mercantile Exchange. The CME first invited members to trade futures contracts on agricultural commodities via the open outcry system. Open outcry was and still is an efficient means of "price discovery," allowing buyers and sellers to arrive at the best prices given the supply and demand for a futures or options product. When you call your broker and tell him to make a trade on your behalf, he relays that message to the trading floor, where a runner then relays the message to the floor broker, who then executes the trade. The runner then relays the trade confirmation back to your broker, who tells you how it went. Finally, the trade reporters on the floor of the exchange watch for executed trades, record them, and transmit these transactions to the exchange, which, in turn, transmits the price to the entire world almost simultaneously.

Electronic Trading Method

Operating virtually around the clock, today the CME Globex trading system is at the heart of commodities exchange. Proposed in 1987, it was introduced in 1992 as the first global electronic trading platform for futures contracts. This fully electronic trading system allows market participants to trade from booths at the exchange or while sitting in a home or office thousands of miles away. On 19 October 2004, the one billionth (1,000,000,000) transaction was recorded. When Globex was first launched, it used Reuters' technology and network. September 1998 saw the launch of the second generation of Globex using a modified version of the NSC trading system, developed by Paris Bourse for theMATIF (now Euronext). To connect to Globex, traders connect via Market Data Protocol (MDP) and iLink 2.0 for order routing. Yes, everyone bar the old open outcry pit traders loves electronic trading in commodities. Ahead of this weeks CFTC hearings on position limits and speculator influence on prices, however, have the commodity regulators perhaps forgotten to question the obvious? That is, the influence of electronic trading on commodity prices. After all, it has only been a few years since ICE and Globex screens revolutionised the way commodities are traded. Coincidentally, it has been in that time that the so-called price anomalies have begun to manifest themselves.

Lets consider the following: ICE Futures closed open outcry on the International Petroleum Exchange in favour of electronic trading in April 2005. Nymex introducedelectronic trading in energy futures on June 13th, 2006. ICE went completely electronic in March 2008. Now, the idea that electronic trading can be anything but a good thing is not a notion the industry will take to favourably. Among one of the main positive side-effects has been the elimination of curve shavers. The electronic screens provide an immediate calculation of where contracts further down the curve should be priced, irrespective of liquidity, quotes and trade. In the days of floor trading, these would be derived from implied calculations. Specialists who were able to generate these quotes quickly and more accurately had an immediate arbitrage opportunity. These specialists became known as curve shavers. Incidentally, we are told, among the biggest practitioners of curve shaving were, among others, J.Aron the commodities arm of Goldman Sachs. Going back to electronic trading, however, its worth considering the way the practice has changed commodities trading more directly. Looking at the ICE screens, which traders particularly seem to love, two immediate effects become clear. Firstly, theres the 24-hour nature of the market. As the recent PVM incident proved, traders are capable of processing large orders at any point in a 24-hour cycle, irrespective of how much liquidity there is, there always appears to be enough to get the trade done. Meanwhile, the screens themselves provide complete anonymity as to who your prospective counterparty is. Lastly, and most importantly, there is the algorithmic tools that exchanges like ICE provide traders with. Note the following description of ICEMaker, available to all platform holders. ICEMaker is an innovative tool available to all traders on the ICE platform. ICEMaker allows traders to link their proprietary front-end trading strategies in Excel to manage orders on the ICE platform without the need to write complex API code. ICEMaker enables traders to efficiently manage multiple simultaneous orders and complex spread relationships using Excel formulas to integrate real-time data from ICE and 3rd-party data feeds within the browser-based WebICE. In effect, among the features is also ICEs own automated tool for ice-berging orders. What Does Iceberg Order Mean? A large single order that has been divided into smaller lots, usually by the use of an automated program, for the purpose of hiding the actual order quantity. These tools are actively used by traders, especially those who are physical intermediary players and general position takers backed by physical volumes. To our knowledge these parties are not largely invested in developing high frequency trading programmes of their own, but rather depend on the automated tools provided by ICE and the like.

As written about here and here, a big debate has grown around the impact of high frequency trading programmes on equities. Among the issues is the ability for superior proprietary programmes to efficiently detect other ice-berg orders and via that, dark pools of liquidity. There are also algorithms focused on detecting buy and sell limits. With such knowledge, what traders might deem to be hidden orders and limits are not necessarily as hidden as they might think. Meanwhile, there is another issue to consider. Most physical intermediaries are focused on hedging via the energy markets. Theyre not in the business of trading oil equities and interest-rate products. Thats not necessarily the case for hedge funds and investment banks active in the commodities space. With clever algorithms at their disposal theres no reason why they cant outwit the physical intermediaries with what they know more about, especially with a latency advantage. Areas they know more about, that is, like equities and bonds. This becomes increasingly tempting with so many commodity ETFs trading on high frequency friendly platforms like the NYSE Arca. The key here is detecting the arbs between the underlying price of the commodities and the actual trading price of the units. Then theres the arbitrage with the interest-rate and Treasury markets. In the days of floor trading, simultaneously buying oil and selling Treasuries if a mis-pricing in inflation expectations opened up would be possible but not half as fluid. Algorithms can completely automate that process.

Practical issues: Electronic trade versus open outcry

Commodity exchanges can play many different roles, and which roles it needs to play will depend on specific conditions - indeed, an exchange that does not meet the specific needs of its market has little or no chance of survival. This underlines the fact that copying existing models, however successful they may be, is not a recipe for success. Much can be learnt from the existing exchanges, from their history, their successes and their failures, but they do not provide a blueprint for new exchange initiatives. Virtually all of the commodity futures exchanges that have been created since 1990 have opted for electronic trading systems. Many of the new contracts introduced on wellestablished open-outcry exchanges are being traded only on electronic systems, not on the open outcry floor. Most of the recent initiatives for inter-exchange cooperation have been based on electronic linkages. Even a number of exchanges trading for physical delivery have also opted for electronic systems (during 1998, Liffe announced that its electronic platform will be available by June 1999, Matif moved from open-outcry to an electronic system, and CBOT, until recently firmly wedded to open outcry manifested its intention to launch daytime electronic trading in five new agricultural commodities). Does this mean that with the advances made in telecommunications and in computer systems, and the concomitant cost reductions, electronic trading systems should be the automatic choice for new exchanges? Not so: although all exchanges can benefit in one way or another from the remarkable progress made in communications and computer technology, foregoing the traditional open-outcry trading system to go completely electronic is not always advisable. To familiarize a commodity sector and government officials, not used to market mechanisms

with the functioning of an exchange, an open outcry is still the best (and lowest-cost)

Gold Market in India

India in World Gold Industry (Rounded Figures) Total Stocks Central Bank holding Annual Production Annual Recycling Annual Demand Annual Imports Annual Exports India (In Tons) 13000 400 2 100-300 800 600 60 World (In Tons) 145000 28000 2600 1100-1200 3700 % Share 9 1.4 0.08 13 22

Indian Gold Market Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. India is the world's largest consumer of gold in jewellery as investment. In July 1997 the RBI authorized the commercial banks to import gold for sale or loan to jewellers and exporters. At present, 13 banks are active in the import of gold. This reduced the disparity between international and domestic prices of gold from 57 percent during 1986 to 1991 to 8.5 percent in 2001. The gold hoarding tendency is well ingrained in Indian society. Domestic consumption is dictated by monsoon, harvest and marriage season. Indian jewellery offtake is sensitive to price increases and even more so to volatility. In the cities gold is facing competition from the stock market and a wide range of consumer goods. Facilities for refining, assaying, making them into standard bars in India, as compared to the rest of the world, are insignificant, both qualitatively and quantitatively.

Major gold producing countries South Africa United States Australia China Canada Russia Indonesia Peru Uzbekistan Papua New Guinea Ghana Brazil

Chile Philippines Mali Mexico Argentina Kyrgyzstan Zimbabwe Colombia

Main features of Key Asian Gold Markets Country Market status Loco london gold trading China Hong Kong India Indonesia Japan Korea. North Korea, South Malaysia Myanmar Philippines Singapore Taiwan Thailand Vietnam Restricted Free Restricted Free Free Restricted Restricted Free Restricted Restricted Free Restricted Restricted Restricted Import of gold bars Restricted Free Restricted Free Free Restricted Free Free Free Restricted Free Free Free Free

Indian Gold Policy The evolution of the gold control policy since independence was centered around some major objectives, viz., weaning away people from gold, regulating the supply of gold, reducing the domestic demand and prices and curbing smuggling. In the wake of the Chinese war, it was felt in some circles that it would be feasible to make a frontal attack on demand for gold in India. Accordingly, the Gold Control Order 1962 was issued, banning the making and selling of jewellery above 14 carats, making it compulsory for gold smiths to be licensed and submit accounts of all gold received and utilised by them etc., The measures met with lot of resistance and criticism. This coupled with administrative complexities resulted in the failure of the Gold Control order.

Bullion imports and exports were also banned but restrictions on import of gold into the country resulted in the flourishing of smuggling and unofficial transactions in foreign exchange. Official imports to discourage smuggling was first mooted in 1977 but viewed against the forex reserves available then, it was thought as an impossible proposition. The Government decided to sell confiscated gold in small quantities through the RBI. However, it did not have any major impact on smuggling. Various schemes for mobilisation of idle gold holdings have been implemented by the Government and RBI in the past, but with little success. The 15-year Gold Bonds at 6 1/2 per cent (November 1962) could mobilise only 16.70 tonnes. A second attempt to garner gold was made through the 7 per cent Gold Bond 1980 Scheme (March 1965) which could mobilise only 6.1 tonnes. The third series designated as National Defence Gold Bonds 1980 (1965) garnered 13.7 tonnes and the Gold Bond Scheme 1993 garnered 41 tonnes of gold. Even after two years of launching the scheme under the recent Gold Deposit Scheme (1997) the mobilization is around seven tonnes only. Thus, attempts to mobilise gold under various schemes have not evoked the desired response. Currently, gold import is permitted through three official channels viz., special import licences, non-resident Indians and authorized banks and institutions. Import of gold through Special Import Licence (SIL) has been negligible after gold import through banks was permitted. It is but natural that NRI route had become less attractive after the banks have been permitted to import gold. The liberalized gold policy has certainly brought to the official sector what originally was an unofficial sector. Without doubt, it has eliminated illegal transactions and profiteers out of such illegal transactions with attendant socio-economic impact of such large scale and high value market involving cross-border operations. At the level of managing external sector and forex markets, the elimination of large unofficial market in forex has improved the policy effectiveness. It may also be noted that the Indian consumer of gold has been spared of huge transaction costs amounting to thousands of crores of rupees on account of the existence of the unofficial sector in the past. Further, duty realization is significant at a time when realization through customs duty on other commodities is coming down. However, there are some who argue that ban on gold imports should be re-imposed, while a few others argue that the duty be hiked on the assumption that such measures would curb the total import bill on account of gold. Past experience does not seem to favour this negative view. In this regard, there is another view which holds that both gold import and export should be totally freed, but this argument ignores the fact that gold has some characteristics of a currency. The regulatory steps The Gold (Control) Act, implemented in 1968 and abolished in 1990, had forbidden the holding of gold in bar form. The repeal of the Act was part of the economic reform process that took place in the wake of the balance of payments crisis of 1990 and 1991. In 1993 the Foreign Exchange Regulation Act was repealed, which had little tangible impact (the Act had treated gold and silver as foreign exchange for foreign exchange control purposes, and allowed the government to restrict dealings therein prior to, or at the point of, import), but reflected a more pragmatic attitude towards gold and silver.

Also in 1993 the government permitted non-resident Indians to bring 5kg of gold into the country twice yearly on the payment of import tax of Rs. 250 per 10 grammes (at current rates this equates to US$14.56/ounce or 4.2%). The allowance was raised to 10 kg per trip in January 1997. Meanwhile in 1997 the Committee on Capital Account Convertibility recommended that the market should be liberalised, but also that a well-regulated and transparent market should be developed. The first step in this process was to allow import and export of gold under Open General Licence and the banks involved had to fulfil certain specific criteria. There are currently approximately twenty such banks operating in the market, both executing international trade in gold and selling and leasing the metal for domestic Indian use. These include local banks ICICI Bank and HDFC bank, both of which are enthusiastic about the developments in the market and are looking to drive developments forward, see below. 1990 Abolition of the long-standing Gold Control Act, which had forbidden the holding of 'primary' or bar gold except by authorised dealers and goldsmiths and sought to limit jewellery holdings of families. 1992 Non-Resident Indians (NRIs) on a visit to India were each allowed to bring in up to 5 kilos (160.7 oz) on payment of a small duty of six per cent. This allocation was raised to 10 kilos in 1997. 1994 Gold dealers could bid for a Special Import Licence (SIL) which was issued for a variety of luxury imports. 1997 Open General Licence (OGL) was introduced, paving the way for substantial direct imports by local banks from the international market, thus partly eliminating the regional supplies from Dubai, Singapore and Hong Kong. The OGL system has also largely eclipsed imports by NRIs and SILs. Additionally, significant temporary imports are permitted under an Export Replenishment scheme for jewellery manufacturers working for export in designated special zones. Table 16: Breakdown of Official Imports Tons Million Ounces NRI & SIL OGL Export Replenish Total Official 3 599 52 654 0.1 19.25 1.67 21.03

Source: 2001 GFMS data In 2001 unofficial imports fell because of a reduction in import duties, pushing down the

local premium and making smuggling less profitable. Ten tola bars are still the preferred form of gold in India, accounting for 95% of imports. In the 2003 budget the Finance Minister reduced the customs duty on serially numbered bars, or. gold coins from Rs. 250 per 10 grammes to Rs. 100 per 10g. At todays rates (gold at $345/ounce), this is the equivalent of a cut from US$16.5/ounce or 4.6%, to $6.6/ounce or 1.9%. The move, which was accompanied by a reduction in customs duties on diamonds, notably on some rough and half-cut stones, is designed to enhance Indias already important role in the worlds jewellery industry. It does not include ten tola bars, which have for years been the favoured bar for hoarding in India (this is partly historical because their design made them particularly suitable for carriage by smugglers). To qualify for the lower tax, the bars should have their weights expressed in metric form. Although ten tola, or TT bars are popular elsewhere, including Saudi Arabia, many have now been melted down in favour of metric bars. The second phase, the development of gold-related financial instruments, is rapidly coming to life. The one blot is perhaps the poor performance of the Gold Deposit scheme, which was launched in October 1999. Under the scheme the State Bank of India takes local gold deposits and issues interest-bearing gold term deposits in return (and allow local banks to lease the metal to jewellers). This has however gathered little momentum as members of the public continue to show a preference for holding their gold in physical form rather than a paper representation. Roughly eight tonnes have so far been mobilised; the bank had been looking for 100t in the first twelve months of the scheme. Gold in any physical form can be tendered and is subject initially to a non-invasive assay (no effect on the piece in question). At that stage, if the tenderer does not agree with the assay results or wishes to withdraw for any reason then he may do so. If the deposit is made, then the metal is melted and subjected to full assay, which would reduce the metal to scrap form. The lock in period has also deterred would be investors. The terms available offer interest rates over a range of lock-in periods from three to seven years, although there was also an initial lock-in period of one year, after which premature encashment would be permitted. The slow uptake of the scheme has meant that leasing to jewellers remains comparatively limited. The State Bank of India (SBI) cut the rates payable on these deposits in April, from 3-4% to 1.5% because of the low interest rates prevailing in the international gold market, which further suggests that uptake is likely to remain sluggish. Of all the precious metals, gold is the most popular as an investment.[1] Investors generally buy gold as a hedge or safe haven against any economic, political, social, or fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). The gold market is also subject to speculation as other commodities are, especially through the use of futures contracts and derivatives.

DEMAND AND SUPPLY OF GOLD

Gold's extensive appeal and functionality, including its characteristics as an investment vehicle, are underpinned by the supply and demand dynamics of the gold market.

Demand Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 70% of world demand in 2008. 55% of demand is attributable to just five countries - India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors. Rapid demographic and other socio-economic changes in many of the key consuming nations are also likely to produce new patterns of demand. Read about Gold Demand Trends in our detailed briefing note, which also includes commentary on supply.

Jewellery demand Jewellery consistently accounts for over two-thirds of gold demand. In the 12 months to December 2008, this amounted to around US$61 billion, making jewellery one of the world's largest categories of consumer goods. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 24% of demand in 2008. Indian gold demand is supported by cultural and religious traditions which are not directly linked to global economic trends. It should be noted, however, that the economic crisis and the consequent recessionary pressures that developed over 2007 and 2008 had a significant negative impact on consumer spending and this, in turn, resulted in the reduced volume of jewellery sales, particularly in western markets. Generally, jewellery demand is driven by a combination of affordability and desirability by consumers, and tends to rise during periods of price stability or gradually rising prices, and declines in periods of price volatility. A steadily rising price reinforces the inherent value of gold jewellery, which is an intrinsic part of its desirability. Jewellery consumption in the developing markets was, until fairly recently, expanding quite rapidly following a period of sustained decline, although recent economic distress may have stalled this growth. But several countries, including China, still offer clear and considerable potential for future growth in demand. Investment demand Because a significant portion of investment demand is transacted in the over-the-counter market, it is not easily measurable. However, there is no doubt that identifiable investment demand in gold has increased considerably in recent years. Since 2003 investment has represented the strongest source of growth in demand, with an increase in the last five years in value terms to the end of 2008 of around 412%. Investment attracted net inflows of approximately US$32bn in 2008. There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. Of the other key drivers of investment demand, one common thread can be identified: all are rooted in gold's abilities to insure against uncertainty and instability and protect against risk.

Gold investment can take many forms, and some investors may choose to combine two or more of these for flexibility. The distinction between buying physical gold and gaining exposure to movements in the gold price is not always clear, especially since it is possible to invest in bullion without actually taking physical delivery. The growth in investment demand has been mirrored by corresponding developments in ways to invest and there are now a wide variety of investment products to suit both the private and institutional investor. Industrial demand Industrial, medical and dental uses account for around 11% of gold demand (an annual average of over 440 tonnes from 2004 to 2008). Gold's high thermal and electrical conductivity, and its outstanding resistance to corrosion, explain why over half of all industrial demand arises from its use in electrical components. Gold's use in medical applications has a long history and today, various biomedical applications make use of its bio-compatibility, resistance to bacterial colonization and corrosion, and other attributes. Recent research has uncovered a number of new practical uses for gold, including its use as a catalyst in fuel cells, chemical processing and controlling pollution. The potential to use nanoparticles of gold in advanced electronics, glazing coatings, and cancer treatments are all exciting areas of scientific research.

Supply Mine production Gold is produced from mines on every continent except Antarctica, where mining is forbidden. Operations range from the tiny to the enormous and there are several hundred operating gold mines worldwide (excluding mining at the very small-scale, artisanal and often unofficial level). Today, the overall level of global mine production is relatively stable, averaging approximately 2,485 tonnes per year over the last five years. New mines that are being developed are serving to replace current production, rather than to cause any significant expansion in the global total. The comparatively long lead times in gold production, with new mines often taking up to 10 years to come on stream, mean mining output is relatively inelastic and unable to react quickly to a change in price outlook. The incentives promised by a sustained price rally, as experienced by gold over the last seven years, are not therefore easily or rapidly translated into increased production. Recycled gold (scrap) Although gold mine production is relatively inelastic, recycled gold (or scrap) ensures there is a potential source of easily traded supply when needed, and this helps to stabilise the gold price. The value of gold means that it is economically viable to recover it from most of its uses; at least, that is, where it is in a form that is capable of being, if need be, extracted, then melted down, re-refined and reused. Between 2004 and 2008, recycled gold contributed an average 28% to annual supply flows.

Central banks Central banks and supranational organisations (such as the International Monetary Fund) currently hold just under one-fifth of global above-ground stocks of gold as reserve assets (amounting to around 29,600 tonnes, dispersed across 110 organisations). On average, governments hold around 10% of their official reserves as gold, although the proportion varies country-by-country. Although a number of central banks have increased their gold reserves in the past decade, the sector as a whole has typically been a net seller since 1989, contributing an average of 447 tonnes to annual supply flows between 2004 and 2008. Since 1999, the bulk of these sales have been regulated by the Central Bank Gold Agreement/CBGAs (which have stabilised sales from 15 of the world's biggest holders of gold). Significantly, gold sales from official sector sources have been diminishing in recent years. Net central bank sales amounted to just 246 tonnes in 2008. Gold production The process of producing gold can be divided into six main phases: finding the ore body; creating access to the ore body; removing the ore by mining or breaking the ore body; transporting the broken material from the mining face to the plants for treatment; processing; and refining. This basic process applies to both underground and surface operations. The world's principal gold refineries are based near major mining centres, or at major precious metals processing centres worldwide. In terms of capacity, the largest is the Rand Refinery in Germiston, South Africa. In terms of output, the largest is the Johnson Matthey refinery in Salt Lake City, US. Rather than buying the gold and then selling it onto the market later, the refiner typically takes a fee from the miner. Once refined, the bullion bars (with a purity of 99.5% or higher) are sold to bullion dealers who, in turn, trade with jewellery or electronics manufacturers or investors. The role of the bullion market at the heart of the supply-demand cycle - instead of large bilateral contracts between miner and fabricator - facilitates the free flow of metal and underpins the free market mechanism. The Gold Bars Worldwide website provides a wealth of additional information regarding the international gold bar market.

Factors influencing the gold price

Today, like most commodities, the price of gold is driven by supply and demand as well as speculation. However unlike most other commodities, hoarding (saving) and disposal plays a larger role in affecting its price than its consumption. Most of the gold ever mined still exists in accessible form, such as bullion and mass-produced jewelry, with little value

over its fine weight and is thus potentially able to come back onto the gold market for the right price.At the end of 2006, it was estimated that all the gold ever mined totaled 158,000 tonnes (156,000 LT; 174,000 ST). This can be represented by a cube with an edge length of 20.2 metres (66 ft). At the end of 2004 central banks and official organizations held 19 percent of all aboveground gold as official gold reserves.Given the huge quantity of gold stored above-ground compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. About 2,000 tonnes goes into jewellery or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.This translates to an annual demand for gold to be 1,000 tonnes in excess over mine production which has come from central bank sales and other disposal. Central banks and the International Monetary Fund play an important role in the gold price. The ten year Washington Agreement on Gold (WAG), which dates from September 1999, limited gold sales by its members (Europe, United States, Japan, Australia, Bank for International Settlements and the International Monetary Fund) to less than 500 tonnes a year.[16]European central banks, such as the Bank of England and Swiss National Bank, were key sellers of gold over this period.[17] In 2009, this agreement was extended for a further five years, but with a smaller annual sales limit of 400 tonnes.[18] Although central banks do not generally announce gold purchases in advance, some, such as Russia, have expressed interest in growing their gold reserves again as of late 2005. [19] In early 2006, China, which only holds 1.3% of its reserves in gold,[20] announced that it was looking for ways to improve the returns on its official reserves. Some bulls hope that this signals that China might reposition more of its holdings into gold in line with other Central Banks. India has recently purchased over 200 tons of gold which has led to a surge in prices.[21] The price of gold is also affected by various well-documented mechanisms of artificial price suppression, arising from fractional-reserve banking and naked short selling in gold, and particularly involving the London Bullion Market Association, the United States Federal Reserve System, and the banks HSBC and JPMorgan Chase.[22][23][24][25] Gold market observers have noted for many years that the price of gold tends to fall artificially at the start of New York trading.[26] Bank failures When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This happened in the USA during the Great Depression of the 1930s, leadingPresident Roosevelt to impose a national emergency and issue an executive order outlawing the ownership of gold by US citizens.[27] There was only one prosecution under the order, and in that case the order was ruled invalid by federal judge John M. Woolsey, on the technical grounds that the order was signed by the President, not the Secretary of the Treasury as required.[28]

Low or negative real interest rates If the return on bonds, equities and real estate is not adequately compensating for risk and inflation then the demand for gold and other alternative investments such as commodities increases. An example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.[29][30] War, invasion, looting, crisis In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises

Oil Market In India

Introduction Crude oil prices behave such as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. The U.S. petroleum industry's price was heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the wellhead averaged $26.64 per barrel adjusted for inflation to 2008 dollars. In the absence of price controls, the U.S. price would have tracked the world price averaging $28.68. Over the same post war period the median for the domestic and the adjusted world price of crude oil was $19.60 in 2008 prices. That means that only fifty percent of the time from 1947 to 2008 have oil prices exceeded $19.60 per barrel. Until the March 28, 2000 adoption of the $22-$28 price band for the OPEC basket of crude, oil prices only exceeded $24.00 per barrel in response to war or conflict in the Middle East. With limited spare production capacity, OPEC abandoned its price band in 2005 and was powerless to stem the surge in oil prices, which was reminiscent of the late 1970s. General Characteristics Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world's primary energy consumption. Almost all industries including agriculture are dependent on oil in one way or other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints, perfumes, etc. are largely and directly affected by the oil prices. Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil, residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke, asphalt and other products are obtained from the processing of crude and other hydrocarbon compounds. The prices of crude are highly volatile. High oil prices lead to inflation that in turn increases input costs; reduces non-oil demand and lower investment in net oil importing countries.

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 sulphur (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.

Crude Oil Units (average gravity)

1 US barrel = 42 US gallons. 1 US barrel = 158.98 litres. 1 tonne = 7.33 barrels . 1 short ton = 6.65 barrels . Note: barrels per tonne vary from origin to origin.

Global Scenario Oil accounts for 40 per cent of the world's total energy demand. The world consumes about 76 million bbl/day of oil. United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4 million bbl/d) are the top oil consuming countries. Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of which OPEC was 112 billion tones.

OPEC fact sheet OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization of eleven developing countries that are heavily dependent on oil revenues as their main source of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC controls almost 40 percent of the world's crude oil. It accounts for about 75 per cent of the world's proven oil reserves. Its exports represent 55 per cent of the oil traded internationally.

Indian Scenario India ranks among the top 10 largest oil-consuming countries. Oil accounts for about 30 per cent of India's total energy consumption. The country's total oil consumption is about 2.2 million barrels per day. India imports about 70 per cent of its total oil consumption and it makes no exports. India faces a large supply deficit, as domestic oil production is unlikely to keep pace with demand. India's rough production was only 0.8 million barrels per day. The oil reserves of the country (about 5.4 billion barrels) are located primarily in Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins. Balance recoverable reserve was about 733 million tones (in 2003) of which offshore was 394 million tones and on shore was 339 million tones. India had a total of 2.1 million barrels per day in refining capacity. Government has permitted foreign participation in oil exploration, an activity restricted earlier to state owned entities. Indian government in 2002 officially ended the Administered Pricing Mechanism (APM). Now crude price is having a high correlation with the international market price. As on date, even the prices of crude bi-products are allowed to vary +/- 10% keeping in line with international crude price, subject to certain government laid down norms/ formulae. Disinvestment/restructuring of public sector units and complete deregulation of Indian retail petroleum products sector is under way.

Prevailing Duties & Levies on Crude Oil Particulars Basic Customs Duty Cess NCCD* Education cess Octroi War fedge Rates 10% Rs.1800 per metric tonne Rs.50 per metric tonne 2% 3% Rs.57 per metric tonne

Oil & Gas - Government Initiatives

New Exploration Licensing Policy (NELP), implemented by government, permits 100 per cent FDI for small and medium sized oil fields via competitive bidding. Public-private partnerships as well as only private investments can foray into the refining sector. In case of an Indian private company, 100 per cent FDI is allowed. 100 per cent FDI is allowed for petroleum products and pipeline sector as well as natural gas/LNG pipeline, for infrastructure related to marketing of petroleum products, market study of formulation and investment financing. Minimum 26 per cent equity is covered over five years, in case of trading and marketing. S Jaipal Reddy, Minister of Petroleum and Natural Gas has asserted in a recent meeting that the government is determined to protect the interest of common man while providing quality petroleum products at reasonable prices. He indicated that with a view to reduce burden on consumers as well as oil marketing companies (OMCs), the government has eradicated the Customs Duty on Crude Oil and trimmed Customs Duty on petroleum products by 5 per cent. Excise Duty on diesel was also reduced by Rs 2.60 (US$ 0.056) per litre.

MOVEMENTS IN OIL PRICES

MONTHLY MOVEMENTS:

World Crude Oil Prices (USD per Barrel)

140 120 100 80 60 40 20 0

World Crude Oil Prices (USD per Barrel):

Crude Oil Prices (USD per Barrel)-2007

Crude Oil Prices (USD per Barrel)-2007

90.32

89.76 85.53

81.27 75.91

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Crude Oil Prices (USD per Barrel)-2008

140 120 100 80 60 40 20 0 Axis Title

Crude Oil Prices (USD per Barrel)-2009

100 80 60 40 20 0 Crude Oil Prices (USD per Barrel)2009, 71.99

Crude Oil Prices (USD per Barrel)-2010

Crude Oil Prices (USD per Barrel)-2010 83.56 67.91 75.09 74.69 71.28 73.56

75.98

77.6

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

YEARLY MONTHS:

Crude Oil Prices (USD per Barrel

$100.00 $80.00 $60.00 $40.00 $20.00 $0.00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Partial Crude Oil Prices (USD per Barrel, $70.67

Crude Oil Prices (USD per Barrel

Crude Oil Prices (USD per Barrel $37.66 $27.39 $27.69 $23.00 $22.81

2000

2001

2002

2003

2004

Crude Oil Prices (USD per Barrel

Crude Oil Prices (USD per Barrel $91.48 $64.20 $53.48 $70.67

$50.04

$58.30

2005

2006

2007

2008

2009

2010 Partial

Stock Market In India

The Bombay Stock Exchange (BSE) (formerly, The Stock Exchange, Bombay) is a stock exchange located on Dalal Street, Mumbai and is the oldest stock exchange in Asia. The equity market capitalization of the companies listed on the BSE was US$1.63 trillion as of December 2010, making it the 4th largest stock exchange in Asia and the 8th largest in the world.[1] The BSE has the largest number of listed companies in the world.[2] As of June 2011, there are over 5,085 listed Indian companies and over 8,196 scrips on the stock exchange,[3] the Bombay Stock Exchange has a significant trading volume. The BSE SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many other exchanges exist, BSE and the National Stock Exchange of India account for the majority of the equity trading in India. While both have similar total market capitalization (about USD 1.6 trillion), share volume in NSE is typically two times that of BSE

History
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to the 1850s, when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange developed the BSE SENSEX in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading SENSEX futures contracts. The development of SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition. This automated, screen-based trading platform called BSE On-line trading (BOLT) currently has a capacity of 8 million orders per day. The BSE has also introduced the world's first centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform.

Indices
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the

dollar-linked version of BSE-100 index on May 22, 2006. BSE launched two new index series on 27 May 1994: The 'BSE-200' and the 'DOLLEX-200'. BSE-500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TECk Index. Over the years, BSE shifted all its indices to the free-float methodology (except BSE-PSU index). BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major indices. The values of all BSE indices are updated on real time basis during market hours and displayed through the BOLT system, BSE website and news wire agencies. All BSE Indices are reviewed periodically by the BSE Index Committee. This Committee which comprises eminent independent finance professionals frames the broad policy guidelines for the development and maintenance of all BSE indices. The BSE Index Cell carries out the day-to-day maintenance of all indices and conducts research on development of new indices.[8] SENSEX is significantly correlated with the stock indices of other emerging markets

Sensex
The Bombay Stock Exchange SENSEX (portmanteau of sensitive and index) also referred to as BSE 30 is a free-float market capitalization-weighted index of 30 well-established and financially sound companies listed on Bombay Stock Exchange. The 30 component companies which are some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy. Published since January 1, 1986, the SENSEX is regarded as the pulse of the domestic stock markets in India. The base value of the SENSEX is taken as 100 on April 1, 1979, and its base year as 1978-79. On 25 July, 2001 BSE launched DOLLEX-30, a dollar-linked version of SENSEX. As of 21 April 2011, the market capitalisation of SENSEX was about 29,733 billion (US$663 billion) (42.34% of market capitalization of BSE), while its free-float market capitalization was 15,690 billion (US$350 billion Calculation The Bombay Stock Exchange (BSE) regularly reviews and modifies its composition to be sure it reflects current market conditions. The index is calculated based on a free float capitalization methoda variation of the market capitalisation method. Instead of using a company's outstanding shares it uses its float, or shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government and strategic investors.[1] Initially, the index was calculated based on the full market capitalization method. However this was shifted to the free float method with effect from September 1, 2003. Globally, the free float market capitalization is regarded as the industry best practice. As per free float capitalization methodology, the level of index at any point of time reflects the free float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is multiplied by a free float factor to determine the free float market capitalization. Free float factor is also referred as

adjustment factor. Free float factor represent the percentage of shares that are readily available for trading. The calculation of SENSEX involves dividing the free float market capitalization of 30 companies in the index by a number called index divisor.The divisor is the only link to original base period value of the SENSEX. It keeps the index comparable over time and is the adjustment point for all index adjustments arising out of corporate actions, replacement of scrips, etc. The index has increased by over ten times from June 1990 to the present. Using information from April 1979 onwards, the long-run rate of return on the BSE SENSEX works out to be 18.6% per annum, which translates to roughly 9% per annum after compensating for inflation.[2]

Correlations
Month Oil Gold Sensex Jan-10 138.74 16684 17260 Feb-10 138.12 16535 16183 Mar-10 139.24 16603 17302 Apr-10 143.07 16679 17678 May-10 140.65 17997 16844 Jun-10 136.49 18741 17299 Jul-10 143.88 18300 17847 Aug-10 151.36 18490 18176 Sep-10 156.14 19087 19352 Oct-10 163.18 19493 20249 Nov-10 164.96 20174 20126 Dec-10 176.43 20496 19927 Correlation Oil and Gold Gold and Sensex Oil and sensex

0.85076 -.84806 -.09246

Oil and Gold Oil and Gold have a positive relationship. The underlying reason is that when the price of oil rises the commodity prices rise resulting in inflation. As a result of inflation people tend to look for safer assets to invest in . Gold is generally considered as a safe asset . Hence the price of gold rises. Gold and Sensex. The relationship between gold and the stock market is negative. This is primarily because of the Inter se allocation of wealth by individuals When stockmarket falls people pull their money out of the stock market and invest it in safe assets like gold hence driving up their prices. Oil and Sensex The relationship between oil and sensex is also negative. More expensive fuel translates into higher transportation, production, and heating costs, which can put a drag on corporate earnings. Rising fuel prices can also stir up concerns about inflation and curtail consumers discretionary spending. But it is also possible to associate expensive crude with a booming economy. Higher prices could reflect stronger business performance and increased demand for fuel