Government hedges against oil price increase at under $70 per barrel

Renewal of hedging contracts every 3 months with review of oil value in markets: Source

The ministry of petroleum and mineral resources, and the ministry of finance agreed to renew the hedge against the rise in oil prices in the global market during the first quarter of the current fiscal year (FY), at a price less than $70 a barrel, which the government has hedged over the past period.
A government source told Daily News Egypt that the government reviewed the expectations of the change in the price of a barrel of oil in world markets after a sudden decline during the second half of 2018/19.
He noted that the hedging price would be revised on a quarterly basis with the investment banks JPMorgan and Citibank to agree on the price of the barrel and renew the hedge contract with the banks.
The source added that political volatility in the region contributed to the decline of the price of a barrel of oil to $60. This is contrary to the expectations of the market and international companies that based their prediction on rising oil prices in the coming period.
He pointed out that the state budget has borne a big difference on international prices for the investment banks, JPMorgan and Citibank, contracted to hedge against the risks of rising prices of petroleum products globally over $70.
The average price of a barrel of oil during the last FY was estimated at $65, thus the state budget will be bearing a difference of $5 for the investment banks due to the sudden fluctuations in the world markets.
He pointed out that the government renewed the agreement to apply the precautionary mechanism of the high prices of shipments of petroleum products during the FY 2019/20, to protect the budget from the financial risks resulting from the fluctuation of oil prices globally.
In its latest financial statement, the ministry of finance said that the latest global estimates indicate that world oil prices will stabilise in 2019 at levels ranging from $65 to $70 per barrel, according to the future prices of oil purchase contracts and the International Monetary Fund (IMF) forecasts, as opposed to those in the global markets due to political fluctuations.
The financial statement for the 2019/20 budget indicated that the implementation of the hedging mechanism aims to protect the current FY budget from the financial risks resulting from fluctuating world oil prices and to reduce any negative effects on the subsidy bill.
The reduction of subsidies for petroleum products in the new budget project amounted to EGP 36.112bn. The government allocated EGP 52.963bn compared with EGP 89.075bn in the current FY 2018/19.
The reduction was about 40.5%, and a decrease of EGP 35.476bn from the expected results. The government explained that fuel subsidies were calculated based on the average price of Brent crude of $68 a barrel.