CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014
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CARIBBEAN Petroleum Update A Publication of the Caribbean Energy Information System (CEIS)
APRIL 2014 ISSUE F u e l H e d g i n g : Us i n g F u t u r e s C o n t r a c t t o H e d g e a g a i n s t vo l a t i l e f u e l p r i c e s Large fuel consuming companies such as utility companies and airlines use large volumes of fuel to carry out their daily operations. In order to minimize their exposure to volatile and rising fuel costs they utilize what is known as fuel hedging. In this issue of the Petroleum Update, we seek to explore the fundamentals of fuel hedging and to gain an understanding of futures contract. Fuel hedging is a contractual tool which allows companies that consume large volumes of fuel to establish a fixed cost when purchasing a commodity. Companies enter into hedging contracts for two main reasons, to reduce their exposure to future rise in fuel prices and to have a fuel cost established for budgeting purposes. The primary idea behind a hedge is that a portion of the commodity is purchased at a set price to be paid sometime in the future. If the price of the commodity rises, that pays off for the company, however if the prices falls below the contracted level, it could be a money losing proposition. Most times fuel consuming companies can project what the price of fuel will be in the future and so will hedge based on their projections. The predicted future price of fuel will determine the cost of fuel hedging. For example, an airline can place hedges either based on future prices of jet fuel or crude oil. Normally though, the price of jet fuel and crude oil are correlated as
crude oil is the primary source of jet fuel. A company that does not hedge its fuel costs generally believes that they have the ability to pass on any increases in fuel prices to their customers, without a negative impact on their profit margins. Also, the company is confident that fuel prices are going to decrease in the future. With regards to a futures contract, this is simply a contract between two parties to purchase pre-determined quantities of a commodity for an agreed price with delivery and payment occurring at a future date. Both buyer and seller are obligated to buy and sell the specified quantity at which the futures contract was sold. However, future contracts rarely result in delivery as the contracts are used for hedging before expiration.
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Therefore, how can futures contract be used to guard against rising fuel prices? Take for example a delivery company that uses fuel for its fleet of delivery trucks. As a strategy to ensure that their fuel costs do not exceed their budgeted fuel price, they “lock in” a price for their anticipated fuel consumption. Say for example the company anticipated fuel consumption is 32,000 gallons of gasoline in April 2015, to hedge against the price of gasoline; you purchase a futures contract for 32,000 gallons based at the closing price as at April 2014 of US$2.90/gallon. However prior to delivery date the company decides to sell back their futures contract, how then would
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CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014
F u e l H e d g i n g : U s i n g F u t u r e s C o n t r a c t t o H e d g e a g a i n s t vo l a t i l e f u e l p r i c e s to the fact that the company did not accept delivery of the futures contract while the pump price would have been e this benefit the company? Assuming that US$2.00/gallon and the net cost will be the prevailing market price at which the US$ 2.90/gallon as a result of the loss on futures is sold back is US$3.50/gallon. the futures contract. In this case the company would have gained on the futures contract a profit Therefore, purchasing gasoline futures of US$0.60/gallon (US$3.50-US$2.90/ contract provided the company to hedge gallon). However, since the company (fix) anticipated gasoline costs for a spedecided that they are not taking delivery cific time period regardless of whether of the futures contract, the price at the the futures price fluctuates between the pumps will be US$3.50/gallon although time of purchase and the date of expirathe net cost will be US$2.90/gallon as a tion. This strategy can also be applied to consequence of the profit gained on the hedging with crude oil futures and even contract. For the ease of simplicity the heating oil futures. net cost would have excluded transportation, distribution fees, taxes, et cetera. In the Caribbean, for example, Trinidad and Tobago owned Caribbean Airlines On the other hand, assuming that the utilized fuel hedging strategies because futures contract was sold back at as oil prices increases the aviation indusUS$2.00/gallon (March 2015 price), the try is one of the first industries that it company would have incurred a loss of impacts. Therefore, the airline uses fuel US$0.90/gallon on their futures contract hedging to ensure that the increased cost (US$2.00-US$2.90/gallon). This is due in fuel prices is not directly transferred to
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the consumers either through the cost of tickets or otherwise. Also, St.Lucia Electricity Services Limited (LUCELEC) utilizes a fuel price hedging programme that is designed to reduce large fluctuations in the fuel surcharge. As a result of this programme consumers saw a reduction in their electricity bills in 2013. Deciding on timing and what future costs to lock in is no easy task, hedging requires methodical market projections. Hedging can be used as an energy-management strategy. While there are many details that need to be considered before buying or selling a futures contract, the basic strategy is this; if a company is seeking to hedge against potentially rising fuel prices they would purchase futures contract on the specific fuel. Similarly, one has to sell futures contract in order to hedge exposure to declining fuel prices.
Sometimes fuel hedging doesn’t completely insulate airlines from price spikes. Image source: http://edition.cnn.com/2011/TRAVEL/03/21/airlines.fuel.hedging/
CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014
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PETROLEUM NEWS & HAPPENINGS New Petrocaribe office opens [...]...Read more 31-53 new wells to be drilled [...]...Read more LNG production inches up [...]...Read more Trinidad & Tobago’s energy sector to show robust growth in 2014: Howai [...]....Read more Harmful Effects of Ethanol in Fuel [...]...Read more
Caribbean Energy IMF says Haiti’s economic growth could be affected by events in Venezuela [...]...Read more Trinidad & Tobago ministers meet Japanese banker to discuss plant financing [...]...Read more
Jamaica’s Petrojam tenders to buy 50,000 bbl ULSD cargo for May [...]...Read more Conejo village Alcalde removed for supporting US Capital [...]...Read more Cuba Moves Ahead With $2.7 Billion LNG, Ammonia Projects [...]...Read more PDVSA to use St Eustatius to load VLCCs [...]... Read more JPS chief to speak at EHF wellness awards dinner [...]...Read more T&T seeks consultant to draft Natural Gas Master Plan [...]...Read more Hard-selling change inside T&T energy belt [...]... Read more
Paulwell wants debate on coal energy; JLP’s position still fuzzy [...]...Read more Customs about-face could make Bahamas key source for U.S. gasoline [...]...Read more PDVSA renting the tanks in the Caribbean to blend crudes and handle trading [...]...Read more Exclusive – Venezuela PDVSA expands Caribbean storage, rents NuStar tanks [...]...Read more Mystery surrounds Energy World Corporation coup in Jamaica [...]...Read more T&T’s LNG business will not be wiped out by American LNG [...]...Read more IDB approves $20 million loan to Panama for rural electrification program [...]...Read more Customers upset at JPS proposed request for rate hike ‘Unacceptable!’ [...]...Read more Jamaica gives green light to 381 MW power deal [...]... Read more YEA say no to JPS hike [...]...Read more Petrotrin to invest $11.3 billion [...]...Read more
RUBiS displaying its true colours [...]...Read more
Repsol drills dry hole offshore Trinidad and Tobago [...]...Read more
Trinidad’s Energy Costs Reduce Data Center Expense and Bring Enterprise IT Value [...]...Read more
Residential Energy Storage Comes to Jamaica [...]... Read more
GOB Waives Expiration On US Capital Exploration License [...]...Read more
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CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014
PETROLEUM NEWS & HAPPENINGS................................cont’d from page 3/ BP farms out deepwater blocks offshore Trinidad and Tobago [...]...Read more
Jamaica seeks to further advance Energy Services Company Industry [...]...Read more
Jamaica grants OK for natural gas power plant [...]... Read more
Smart Meters to be installed in St. Kitts homes by 2017 [...]...Read more
Mayan Communities Back To Court Against US Capital [...]...Read more
Libyan rebels agree to reopen two oil terminals after deal [...]...Read more
Energy World International Granted Licence for 381MW Project [...]...Read more
St. Kitts Adopting Smart Meter [...]...Read more
Oil prices steady as Libya woes ease [...]...Read more
Petrotrin ‘committed to transparency in handling oil spills’ [...]...Read more
Energy World Gets Down To Business [...]... Read more
Trinidad and Tobago’s deepwater bid round draws lackluster response [...]...Read more
Oil spill report due month end [...]...Read more
Canadian Corporation Plans Tar Sands Strip Mining in Trinidad and Tobagol [...]...Read more SATIIM says it will do what it takes to block the oil company [...]...Read more Energy Minister Surprised By UC Rusal’s Overseas Expansion [...]...Read more The Belize Natural Energy and Government of Belize Charitable Trust Launch Empowerment Fund [...]... Read more Multiple bombings paralyze Colombian pipelin [...]... Read more Brazil’s energy giant Petrobras is mired in controversy [...]...Read more
MENA Hydrocarbons Announces Sale of Non-Core Assets and Changes in Board of Directors and Executive Officers [...]...Read more Hotline for disconnected Grand Bahama Power Customers Established [...]...Read more Politicians squabble over energy prices [...]... Read more Tobago, Major Energy Player? [...]...Read more Tobago forecast to be major energy player [...]... Read more Puerto Rico aims to cut energy production costs [...]... Read more Takeover Safeguard Built Into EWI Deal [...]... Read more
Govt allocates J$7.4m to support Latin America energy organization office in Jamaica [...]...Read more
Get On With LNG Energy Project! [...]...Read more
Continued subsidy for Linden electricity is due to non-fulfillment of 2012 deal – chairman says [...]... Read more
Maranco Energy Belize Limited confirms possible reserve of fifty million barrels of oil in South Canal Bank [...]...Read more
Puerto Rico Agreement for Floating Storage and Regasification Unit Signed [...]...Read more
Sol To Retain Esso Brand [...]...Read more
$156.3 Million for Rural Electrification Programme [...]..Read more
CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014
Prices at the Pump
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APRIL 2014
Retail pump prices for Regular Unleaded Gasoline in the thirteen (13) Caribbean countries reviewed at the end of April 2014 showed increases in prices for five countries namely; Barbados, Dominica, Grenada, Jamaica and Suriname. Price increases ranged between 1.3% and 4.4%, with Barbados experiencing the highest increase of 4.4%. Prices in the remaining eight countries were stable when compared to the previous month. The average retail price at the end of April 2014 saw a marginal increase with the average price in the region reflecting a US$0.01 per litre increase when compared to the previous month. Regular Unleaded Gasoline: Average Retail Price (US$/Litre) 2014 COUNTRIES
JAN
FEB
MAR
APR
AVG
ANTIGUA/ BARBUDA
1.23
1.23
1.23
1.23
1.23
BAHAMAS [91 OCT]
1.36
1.36
1.38
1.38
1.37
BARBADOS
1.54
1.57
1.59
1.66
1.59
B.V.I [87 OCT]
1.21
1.21
1.21
1.21
1.21
DOMINICA
1.15
1.16
1.18
1.19
1.17
GRENADA (95 OCT)
1.26
1.26
1.28
1.31
1.28
GUYANA
1.09
1.10
1.12
1.12
1.11
JAMAICA 87 Octane[E10]
1.23
1.24
1.26
1.28
1.25
ST. LUCIA
1.32
1.31
1.31
1.31
1.31
ST. VINCENT/ GRENADINES
1.08
1.07
1.09
1.09
1.08
SURINAME [95 OCT]
1.39
1.37
1.37
1.41
1.38
TRINIDAD/ TOBAGO [92 OCT]
0.42
0.42
0.42
0.42
0.42
TURKS/ CAICOS
1.52
1.52
1.52
1.52
1.52
NOTE: *US Gallon = 3.785 L *Imperial Gallon = 4.546 L *As at November 1, 2009 MTBE was phased out from all gasoline blends in Jamaica and replaced with 10% Ethanol.
Comparative Retail Pump Prices Regular Unleaded Gasoline 1.80
APRIL Avg vs 4 Mths Avg (Jan - April 2014)
US$/Litre
1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
13 Caribbean Countries
See prices for all products at www.cippet.org
International OIL PRICES
CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014
US$/BBL
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105.00 104.00 103.00 102.00 101.00 100.00 99.00 98.00 97.00 96.00 95.00 94.00
Average Weekly & Monthly Crude Oil Prices (Feb April 2014) 103.90
103.07
102.93
Feb-14 WK1
WK2
Mar-14 WK3 Period
Apr-14 WK4
MTH AVG
International Crude Oil Prices ended the three month period February to April 2014 with an average price per barrel of US$102.30. The highest weekly price seen in April for the commodity was US$103.90/bbl-reflected in week three while the lowest price for the three month period was in February of US$97.79/ bbl. Average Prices in February and March 2014 respectively were 1.4% and 1.5% lower than the average price seen in April 2014.
FEATURED OFFERS: Caribbean Energy Information System (CEIS) primary report of historical annual petroleum energy statistics provided for 18 Caribbean Countries. Included are data on total energy production, consumption, and trade; overviews of petroleum, natural gas, electricity, as well as financial and environmental indicators for over twenty years.
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