Oil Companies Seeking Dollars

Oil companies are finding themselves in an interesting predicament. They need dollars and this slow down in capital money coming in combined with a surge of the dollar against other foreign currencies has made the Forex market a bit volatile, pulling currencies like the rupee, which has stood fairly firm against the fluctuating dollar these past months, down. The oil companies had been using a special financial window that the Reserve Bank of India (RBI) had opened for them in June and July to purchase foreign exchange. The window has now come to an end and the oil companies need more American dollars.

Because the rupee has dropped against the dollar, the cash-strapped oil companies are being forced to use more of their capital to buy dollars. The state run oil companies are in an even more precarious situation, dealing with pressure from two sides. The first pressure comes from global crude oil prices dropping back to between $115 and $120 a barrel after months of it being $147. This normally would be helpful to the oil companies except the under-recovery that comes with crude oil fluctuations such as this has hit the bottom. The adverse implication had the RBI opening the special window for state run companies at the end of May. Prior to the window opening and the drop in crude oil prices, the companies had been $300 million in dollars on a daily basis.

During the window’s operating time, oil companies were allowed to sell oil bonds and then turn around and purchase dollars from the Reserve Bank of India. This selling and buying scheme not only helped the oil companies, it also eased the pressure on Forex markets and brought the volatility of the trading world back under control.

The problem, now that the window is closed, is that the oil companies are turning back to the market traders in search of dollars. They have exhausted the pool of oil bonds and the Reserve Bank of India has closed the window as of the end of July. OMCs have also returned to the foreign exchange market in an effort to clean up foreign currency. They do this whenever capital flow into the Indian forex market declines.

According to a senior executive at the Indian Oil Corporation (IOC), “When we were buying forex from RBI under the window, the environment was stable. Now, when we are back in the market, the companies experience a tight condition in buying dollars.”

This high dollar demand by the oil companies and other importers in the Indian market has capped the steep rise of the rupee, and dealers are hoping to see it remain steady between 43.30 and 43.50 against the dollar. The Clearing Corporation of India compared the rupee’s opening numbers on Monday, August 25, 2008 at 43.46, closing at 43.78 against the dollar as compared to Friday, August 22, 2008 closing at 43.43.

SOURCE: http://www.tradetnt.com/oil-companies-seeking-dollars/1167.html