Egypt will hedge in the coming fiscal year

Egypt will hedge in the coming fiscal year

/ Financial News / Wednesday, 14 August 2019 11:28

Egypt, North Africa’s largest economy, has made plans to hedge against rising oil prices during the fiscal year 2019-2020, said Egypt’s Finance Minister Mohamed Maait.

“We hedged against oil price increase during the current fiscal year,” said Maait, in reference to their finishing of the program which was rumored across the oil industry earlier this month.

“We will hedge in the new fiscal year,” he added. The new fiscal year begins in July.

Maait’s comments came as oil traders and brokers stated that a government had been involved in the market in June this year and took advantage of the dip in crude prices. Many have likened the Egyptian program to that of the famous oil hedge of Mexican where the oil exporter spends billions of dollars to protect them against low oil prices.

Oil hedging involves a contractual tool whereby a company can fix their oil price or cap it to a certain level for a specific period of time, hence protecting it from fluctuating prices.

Countries such as Morocco, Uruguay and Jamaica have followed suit but on a fairly limited scale.

The size of Egypt’s program is yet to be revealed, however the country’s market activity has helped indicate the price at which they have managed to hedge oil.

Some traders and brokers from the industry managed to point out patterns that potentially indicated a big player who bought protection against rising oil prices. The experts also saw some activity for call options which essentially give buyers the ability to buy at a fixed, predetermined price. They found that around $70 a barrel was requested for December 2019 along with some maturities in 2020.

While Egypt does have some oil, it has become a new petroleum importer since 2011 which has exposed the country to rising prices. In fact, the US Energy Information Administration found that in 2017 Egypt consumed around 800,000 barrels a day compared to the domestic output of approximately 650,000 barrels per day.

For the fiscal year (FY) 2019-2020, Egypt’s budget is based on $68 per barrel of oil as opposed to $70 a barrel from FY 2018-19.

It has been speculated that in the previous fiscal year, Egypt hedged its oil prices through Citigroup Inc. and JP Morgan Chase & Co and that Cairo plans to use them both again for FY 2019-20. Egypt has been considering extra banks to hedge their prices through.

Maait stated that Egypt decided not to hedge again wheat during the previous fiscal year but is not sure yet about the country’s decision regarding this matter for FY 2019-20. Indeed, Egypt is the world’s largest grain importer.

“We didn’t decide yet if we will hedge against fluctuations in global wheat price in the next fiscal year because we need to complete the required procedures first,” said Maait.

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