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CARIBBEAN Petroleum Update A Publication of the Caribbean Energy Information System (CEIS)
FEBRUARY 2015 ISSUE
F uel P rice H edging
V
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ulnerability to fluctuating crude oil prices has always impacted the energy security of most Caribbean countries. To ensure energy security, energy resources must be affordable and must also be consistently available. At the core of the economic development of a country is energy security which takes into con-
sideration a short term and a long-term approach to securing energy. The long term aspect of energy security focuses on economic and environmental developments with regards to the supply of energy. Short-term energy security focuses on the ability of the energy structure to react swiftly to sudden changes in the energy production and
consumption variables. In light of the recent plummeting of crude oil prices and in order to secure against the prospects of prices going up sharply again and derailing economic progress, many governments globally and in the Caribbean are looking at what is known as petroleum fuel price hedging. In this issue of the Petroleum Update we
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Fuel Price Hedging continued from page 1/
will take a brief look at what is Fuel Price Hedging and the possible short and long term impact on firms and consumers? Fuel Price Hedging is essentially a risk management strategy aimed at offsetting the probability of loss from fluctuations in the prices of commodities, currencies and securities. In effect, hedging is a transfer of risk without buying insurance policies. Hedging employs various techniques but, basically, involves taking equal and opposite positions in two different markets (such as cash and futures markets). Crude oil producers can hedge against falling crude oil prices by taking up a position in the crude oil futures market. Crude Oil producers can also employ what is known as a short hedge to lock in a future selling price for an ongoing production of crude oil that is only ready for sale sometime in the future.
To implement the short hedge, crude oil producers sell (short) enough crude oil futures contracts in the futures market to cover the quantity of crude oil to be produced. Also, businesses that need to buy significant quantities of crude oil can hedge against rising crude oil price by taking up a position in the crude oil futures market. These companies can employ what is known as a long hedge to secure a purchase price for a supply of crude oil that they will be required sometime in the future. To implement the long hedge, enough crude oil futures are to be purchased to cover the quantity of crude oil required by the business operator. Some of the most common hedging strategies include; Market Price, Fixed Price, Capped Price and Max/Min Price hedging (please refer to Table 1 above). In this example, we will highlight a fixed price hedge which uses the swap
contract. Company X agrees to enter into a contract with a hedge provider to purchase fuel. The contract for the hedge specified that the fixed price level is set at $5.75 per gallon of fuel with a reference price of $5.50. If the reference price is higher than the fixed cost, the hedge provider pays Company X a difference of $0.25 per gallon. If the reference price is lower than the fixed cost, then Company X firm must pay the hedge provider the difference. For a fixed price contract to work well, it is not necessary that the price the firm pays at the pump be the same as the reference price but it must be highly correlated. If the pump price and the reference price are perfectly correlated then each increases or decreases the same amount at the same time. For budgetary purposes, fixed priced hedging allows a firm to estimate fuel costs easier by using a fixed unit instead
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of a variable cost. In addition, the advantages of a fixed price contract such as a swap include zero upfront costs and protection against price increases above the fixed level. The downside however is that if prices fall, the firm will be stuck paying the fixed level. In the long term consumers may reap the benefits of a hedge through lower fuel costs, however in the short run, say for example consumers of air travel, may not see a reduction in ticket prices as airline companies are not dependent on the price of fuel to sell seats. Hedging essentially is similar in nature to an insurance premium to guard against the risk of any sharp increase in prices. If oil prices were to trend upwards against the contracted price, then the country will get a payment which allows the country to cushion the effect of this movement to the general public and protect the nation’s balance of payment. While consumers benefitted from the decrease in oil prices on the global market, the situation presents significant risks to any country’s fiscal situation. Risks include relaxed efforts in being less dependent on oil over the medium term. Additionally, if oil prices were to increase this would have a negative effect on the balance of payments and on the general economy.
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the year ahead. It is very important that when hedging, one should not target the change in price but rather type of hedging that is being used. In the long-term, hedging pays off as it creates stability, which in turn improves the economic system. One should also question the types of instruments used by governments when it comes to hedging as this is of the utmost importance, especially when it comes to cost and flexibility. Furthermore, it is also important to bear in mind that foreign exchange hedging compliments oil hedging. Since oil is priced in US dollars and our taxes are collected in Caribbean currencies, there is an exposure to the Caribbean exchange rate when purchasing oil. Hedging can be used as an energy management strategy, however, deciding on timing and what future costs to lock in is no easy task, hedging requires methodical market projections. 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.
There are a number of factors that make hedging ideal, but the most important thing is to understand and determine the reason behind the hedge. Governments hedge their oil prices not to benefit from a change in price, but rather to lock in a price for several months, enabling them to plan and budget
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CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : FEBRUARY 2015
PETROLEUM NEWS & HAPPENINGS Energy Subsidies Cost Bahamas 1% Of Gdp [...]... Read more Gas prices up $2.21, diesel up $2.98 [...]...Read more The price of oil is on a wild ride, few agree where it’s headed [...]...Read more Oil Predict A Barrel of Oil at Low Prices in 2015 and do not see a “Fast” Recovery [...]...Read more
Caribbean Energy YPF sticking to US$6bn investment plan – CEO [...]... Read more Venezuelan oil, gas and petrochemicals [...]... Read more Planned, unplanned maintenance under way at Venezuelan refineries [...]...Read more RUBiS rolls out Ultra Shop [...]...Read more Gas prices up $1.47, diesel up $0.25 [...]...Read more Oil: Shocking how vital it still is [...]...Read more Oil rigs fall idle after global crude prices drop [...]... Read more Oil’s Slump a blow to Mexico amid touted Energy Reforms [...]...Read more UT Jackson School of Geosciences Aims to Enhance Research in Mexico [...]...Read more The oil price drop – in 90 seconds [...]...Read more PDVSA Close To Selling 49% Stake in Petrojam: Jamaica willing to give up Majority control [...]... Read more Gas prices up $1.73, diesel up $0.99 [...]...Read more
PDVSA and Petrobras outperform in weak session [...]...Read more JPS to spend $50b on Old Harbour plant [...]... Read more Gas prices up $2.51, diesel up $1.66 [...]...Read more The unhelpful geopolitics of energy in the Caribbean [...]...Read more
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CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : FEBRUARY 2015
Prices at the Pump
FEBRUARY 2015
Retail prices for Regular Unleaded Gasoline in the fourteen Caribbean countries reviewed at the end of February 2015 showed decreases in prices for five countries: Barbados, Belize, Dominica, Grenada, Jamaica, between 5% and 7%. Dominica saw the highest price decrease of 7.6%. Prices in the remaining nine countries were stable. The average retail price at the end of February 2015 was 2% lower when compared to the previous month. Unleaded Gasoline: Regular Average Retail Price :– January - February 2015 (US$/Litre) COUNTRIES
JAN
FEB
AVG
ANTIGUA/ BARBUDA
1.11 1.13 1.53 1.12 0.92 0.97 0.93 0.96 1.04 0.96 1.21 0.85 0.65 0.42
1.11 1.17 1.42 1.06 0.85 0.90 0.93 0.89 1.04 0.96 1.21 0.85 0.65 0.42
1.11 1.15 1.48 1.09 0.89 0.94 0.93 0.93 1.04 0.96 1.21 0.85 0.65 0.42
BAHAMAS [91 OCT] BARBADOS BELIZE [87 OCT] DOMINICA GRENADA (95 OCT) GUYANA JAMAICA 87 Octane[E10] MONTSERRAT ST. KITTS/ NEVIS ST. LUCIA ST. VINCENT/ GRENADINES SURINAME [95 OCT] TRINIDAD/ TOBAGO [92 OCT]
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.
1.60
Comparative Retail Pump Prices Regular Unleaded Gasoline FEBRUARY 2 mths Average (Jan-February 2015)
US$/Litre
1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00
14 Caribbean Countries
See prices for all products at www.cippet.org
International OIL PRICES
CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : FEBRUARY 2015
Average Weekly & Monthly Crude Oil Prices (Dec-14 - February 2015)
80 70 60
US$/BBL
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67.18 53.44
51.69
50 40 30 20
Dec-14
10
Jan-15
Feb-15
0
WK1
FEATURED OFFERS: P E TS TATS - t h e Ca r i b b e a n E n e rg y I n fo r m at i o n 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.
WK3 Period
WK4 MTH AVG
Average Monthly World Crude Oil Prices (2012 - 2014) 110.0
US$/BBL
Analysis of International Crude Oil Prices from January 2015 to February 2015 period showed an average price of US$50.64/bbl . This average price was 3.5% higher than the price in January 2015. The slight increase in prices is likely attributed to a reduction in US Shale gas production. The highest weekly price seen in February 2015 for the commodity was US$50.58/ bbl-reflected in week one while week four accounted for the lowest price of US$49.16/ bbl. The average price reported in February 2015 was 50% lower than the average price seen in February of the previous year.
WK2
106.6
106.6
105.8
90.0
70.0
2012
2013
2014
50.0
Period
Scientific Research Council, Hope Gardens, Kingston 6, Jamaica 1-876-927-1779 (Telephone) 1-876-977-1840 (Fax)
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