FX futures ease liquidity challenge for petrol marketers

The new Foreign Exchange (FX) futures market introduced by the Central Bank of Nigeria (CBN) is gradually opening up opportunities for petroleum products importers to access FX as high interest rates of commercial banks and bruising exposure to the petroleum sector continue to limit lending.

Analysts who spoke to BusinessDay said even though there were surmountable challenges, futures contracts may be the profit path for operators in the downstream sector as  the Federal Government remains keen on maintaining N145 as price ceiling for petrol.

“The recent OTC FX future market initiated by the CBN is a good step towards assisting  petroleum products importers in Nigeria source for foreign exchange within a specified future date,  minimizing the risk associated with the fluctuation or volatility in the exchange rate currently experienced by petroleum products importers in the spot market,” said Henry Biose, economics, management and policy researcher at the University of Port Harcourt.

Biose further said that the tenors of between one and 24 months are the specified maturity period for the OTC FX future contracts and that it is a good timeframe for the importers.

“The OTC FX future market also guarantees” availability of foreign exchange at all times to importers, but the price in the future market will still remain a function of the prevailing price in the spot market. For every market, there should be a buyer; therefore, the importers should approach the OTC FX future because the risk is relatively reduced,” he added.

Francois Conradie, head of research at NKC African Economics, explained the process, “Theoretically, they can buy ‘call’ options, to buy dollars at say N290 six months from now, so they know that if they import PMS at $0.5/N1 then it costs N145‎. But a trader (the holder of the ‘put’ option) will only stand on the other side of that trade if he thinks he can buy foreign exchange at less than N290 at the spot price on the day, but that market isn’t really active for now.”

Seth Blumsack, Assistant Professor of Energy Policy, Department of Energy and Mineral Engineering, College of Earth and Mineral Sciences, Pennsylvania State University, said the volatility of crude oil markets and the interplay of demand and supply contribute to the slow growth witnessed in the futures market.

Blumsack said the New York Mercantile Exchange (NYMEX) offers futures contracts for several refined petroleum products – the most frequently-traded being heating oil and gasoline.

The NYMEX is a commodity futures exchange owned and operated by CME Group Chicago. It is located in Brookfield Place, Manhattan, New York City. Oil and derivates are also traded on ICE futures markets.

The American Petroleum Institute says futures markets bring a number of benefits to the global oil market. It states that the crude oil futures markets provide information about future expectations regarding supply and demand conditions; it makes expectations transparent in the form of a series of futures prices for crude to be delivered at different dates in the future.

Also, crude oil producers, marketers, refiners, and others, are able to use the financial contracts on the exchanges to manage risk, facilitated in part by the participation of investors with no commercial interest in the petroleum industry (i.e., no capacity to produce, refine, store, or sell physical volumes of crude or petroleum products), but who provide beneficial liquidity in the marketplace.

The First Naira-Settled OTC FX Futures Contract, where the CBN is the pioneer seller, has FMDQ as the OTC FX Futures Exchange.

The CBN OTC FX Futures rates released shortly after the launch shows 12-month (June 2017) tenor rate at N225/$; 9-month (March 2017) tenor rate at (N222/$); 6-month (December 2016) tenor rate at (N250/$); 3-month (September 2016) tenor rate at (N275/$); and 1-month (July 2016) tenor rate at (N279/$).

The OTC FX futures market is a non-deliverable forwards contract which will also improve FX liquidity, while  reducing volatility occasioned by panic-buying and front-loading.

ISAAC ANYAOGU