Page 4 - MEX Express - Vol 7 Issue 2
P. 4                                                          MARKET PERSPECTIVE                                                             Volume: 7 • Issue: 2 • Year: 2015 A.D

                  Customers of the Crude Oil Market

Oil production is presently wide spread across the globe. Most of         discussions about peak oil, consumers’ fuel budgets and choices of which       by a higher demand than actual oil extraction capacity disregarded
      the oil used today is extracted within the OPEC area, consisting    vehicles or heating appliances to buy are largely affected. Oil production     the technological capabilities. This creates large producer surpluses,
of countries in the Middle-east, North and West Africa. The majority      capacity is limited but demand is constantly increasing, creating increased    whilst the consumer surplus which is getting smaller. Present price
of oil is extracted via traditional sources i.e., primarily oil wells on  prices. Due to the excess demand of oil, prices are higher than marginal       formation of oil products thus generates significant profit margins
land. There are also some oil-rigs at sea, especially in the North Sea    cost of production for most producers. In a well-functioning market with       for most producers. As noted previously also, oil consumption has
and Mexican Gulf. A very small part of the produced oil comes from        perfect competition, prices are set equal to marginal cost of production.      a strong relation to GDP development, resulting in higher demand
alternative sources, such as oil sand. Alternative extraction methods     The large difference in this case is partly caused by the capital intense      when developing countries become industrialized. Substantial price
are more expensive than traditional oil wells, but still they are         nature of production, which makes the supply regulation to demand very         increases and stable output volumes of oil provide signals that
profitable during high-price market conditions. Capital intensity of      slow. Also, the price gap can be signaling scarcity of oil reserves, caused    costumers have an inelastic demand for oil, as is also the case for
production is often very high, due to the need of advanced equipment                                                                                     electricity. Most energy products seem to have, at least in short term,
and infrastructure to procure oil from large depths. Thus, the most                                                                                      inelastic demand. It is therefore a risk involved in being dependent
risk exposed customers are the producers, wanting to lower capital                                                                                       of oil products, either economically or socially.
risks. The incentives for decreasing risk are in principal the same
as for producers on electricity markets. The similarities, however,                                                                                                               Source: U.S Energy Administration Department
diminish when it comes to supply and demand. Supply changes have
by far fallen short of demand increments, which have caused prices                                                                                                            Lalbabu Shah
to increase to levels higher than marginal cost of production. Even                                                                                                           Gahanagriha Investment Pvt. Ltd.
though the producers are the best beneficiaries, the market has been
Due to high volatility in oil prices combined with the on-going

                  Commodity Market & its Challenges

In a simple language, a physical or virtual marketplace for buying,       (MEX) has been established. MEX has also made immense contribution             are such participants who are willing to take risk of hedgers in
selling and trading raw or primary products is commodity market.          in raising awareness about and catalyzing implementation of policy             the expectation of making profit. Speculators provide liquidity
In other words, commodity market is a reasonably interchangeable          reforms in the commodity sector. MEX is the first Exchange to take up          to the market; therefore, it is difficult to imagine a futures market
good or material, bought and sold freely as an article of commerce.       the issue of differential treatment of speculative loss. It is also the first  functioning without speculators.
Commodities include agricultural products, fuels, and metals and are      Exchange to enroll participation of high net-worth corporate securities        So there comes a question what is the difference between a speculator
traded in bulk on a commodity exchange or spot market. Commodities        members in commodity derivatives market.                                       and a gambler. Speculators are not gamblers, since they do not create
are hard assets ranging from wheat to gold to oil. Since there are so     Challenges for Commodity Market In Nepal                                       risk, but merely accept the risk, which already exists in the market.
many, they are grouped in three major categories: agriculture, energy     The Nepalese Commodity Market is very young. The investors haven’t             The speculators are the persons who try to assimilate all the possible
and metals. Agriculture commodity includes, such as sugar, cocoa,         been able to analyze the situation properly. They are not smart enough         price-sensitive information, on the basis of which they can expect to
and coffee and Grains, such as wheat, soybeans, soybean oil, rice,        to study the situation and take good judgments. There is no regulating         make profit. The speculators therefore contribute in improving the
oats and corn. The energy category includes crude oil, natural gas,       body in the Nepalese commodity market. Most of the investors find the          efficiency of price discovery function of the futures market.
and heating oil. Metals include mined commodities, such as gold,          commodity market as some sort of gambling place where people gather            In the Nepal’s economy, there are various factors that are having
copper, silver and platinum. Commodities are traded by dealers on         together for gambling purpose and try to make out high returns with least      a real negative impact on the overall performance of the Nepalese
an open exchange. That means the prices change every day. This            investments. But it is very important that one must realize that there is      markets. The major challenges that this market is facing can be listed
can be difficult for the consumer, who must face price variations in      a difference between gambling and speculation and the future markets.          as:
everyday products such as gasoline, gold and grains. The highest                                                                                         • Lack of market awareness and education program regarding to
volume of trading occurs in oil, gold and agricultural products.          Participants in physical markets use futures market for price discovery
There are numerous ways to invest in commodities. An investor can         and price risk management. In fact, in the absence of futures market,                commodity market.
purchase stock in corporations whose business relies on commodities       they would be compelled to speculate on prices. Futures market helps           • Government being not very supportive for the regulation of
prices, or purchase mutual funds, index funds or exchange-traded          them to avoid speculation by entering into hedge contracts. It is however
funds (ETFs) that have a focus on commodities-related companies.          extremely unlikely for every hedger to find a hedger counterparty with               commodity market.
The most direct way of investing in commodities is by buying into         matching requirements. The hedgers intend to shift price risk, which they      • Lack of sufficient penetration of internet in urban areas,
a futures contract.                                                       can only if there are participants willing to accept the risk. Speculators
In business, commodities can be defined as any good or service                                                                                                 computer literacy with minimum number of people, non-
that is bought and sold purely on price. These include the traded                                                                                              commercialized agro production sector, lower literacy rate and
commodities, but can also include products that are not very                                                                                                   lack of knowledge of commodity market are the challenges in
differentiated from others based on brand, benefits or other                                                                                                   this market.
distinguishing features. For example, Coca-Cola is a branded                                                                                             • Again, the absence of a proper act and regulation, lack of
product that receives great loyalty, and a higher price, because of                                                                                            transparency among the commodities exchanges, is signaling
its perceived differentiation from other cola drinks. A low-cost store                                                                                         that a delay in bringing them under a regulatory ambit will put
brand is more of a commodity, because it isn’t much different from                                                                                             large sums of money from investors in danger.
other store brands and is bought primarily because of its low price,                                                                                     Competition from new technologies and managing long-term
not its taste.                                                                                                                                           investment with the potential for extreme price volatility
                                                                                                                                                         All in all, the commodity market in Nepal does not have a long
Commodity Market in Nepal                                                                                                                                history and thus seems to be still underdeveloped. Government
Markets for futures trading were developed initially to help                                                                                             has prepared some concepts on the commodity market for risk
agricultural producers and consumers manage the price risks they                                                                                         minimizing for farmers but still the investors are motivated towards
faced during harvesting, marketing and processing food crops each                                                                                        earning abnormal profits from speculation. Even though the focus
year. Today, futures exist not only on agricultural products, but also                                                                                   is for agricultural risk management the overall utilization of the
in a wide array of financial, stock and forex markets.                                                                                                   market is for speculation. People are utilizing the derivative market
In the 21st century, online commodity trading has become                                                                                                 for speculating rather than risk hedging. Existing commodities
increasingly popular, and commodity brokers offer front-end                                                                                              exchanges and the people who take part in the market phenomena
interfaces to trade these electronic-based markets. A commodities                                                                                        should be aware to keep the future of the derivatives market bright.
broker may also continue to offer access to the traditional pit-traded,                                                                                  The commodity market needs to focus on variety of commodities
or open-outcry, markets that established the commodity exchanges.                                                                                        that can manage the risks of that particular commodity. The
In Nepal, three commodities exchanges — Commodities & Metal                                                                                              derivative market on the resources available locally can help develop
Exchange Nepal Ltd (COMEN), Mercantile Exchange Nepal                                                                                                    the derivatives market as well the infrastructures making people as
Ltd (MEX) and NDEX — are working to provide investment                                                                                                   well as the country resourceful. The people should be aware of these
opportunities to around 2,000-3,000 people. The majority of                                                                                              markets and the role it can play in their economic elevation. It can
transactions of community exchange are in gold and crude oil,                                                                                            bring the stability in the market condition of derivatives in Nepal.
products not produced in Nepal.                                                                                                                          It is solely the effect of role that people can play to balance the
In Nepal, commodity market was introduced by Commodities                                                                                                 derivatives economy. How fast and with what level of ease does the
Exchange Nepal Ltd (COMEN). COMEN have been providing trade                                                                                              economy overcome the imbalance is what determines the future of
services in agriculture goods. It will build warehouses to improve                                                                                       the Nepalese Commodity Market.
services. It also applied to Securities Board of Nepal (SEBON) on
November 11, 2009 for starting a new stock exchange. Now with                                                                                                                 Sunita Shrestha
new vision and new technology Mercantile Exchange Nepal Ltd.                                                                                                                  Master in Business Administration
                                                                                                                                                                              SAIM College

Editorial Board: Mr. Aashik Koirala / Mr. Lakshman Pandit / Mrs. Liberty Shakya                                                                          Page 04
Mercantile Exchange Nepal Limited, House No.:25, Shesh Marg, Charkhal, Dillibazar, Kathmandu, Nepal
Phone: +977-1-4423566/77/88 | Fax: +977-1-4417854/55 | E-mail:
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