Jamaica contemplates new oil hedge
Published:Thursday | December 15, 2016 | 12:00 AMMcPherse Thompson
Consideration is still being given to the implementation of further hedge contracts for crude oil imports when the current arrangements expire this month, the Bank of Jamaica (BOJ) said last Thursday.
In that regard, the central bank said that it was unable to say definitively whether the weighted average strike price under a new contract would be sufficient to cushion Jamaica from worldwide production cuts agreed by both Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers.
Senior Deputy Governor at the BOJ, John Robinson, said that the risks that gave rise to the first hedge were still in existence.
"Jamaica imports all the crude and petroleum products that it consumes and is, therefore, exposed to oil price volatility," he said in an emailed responses to Gleaner Business queries.
"In this context, the risk of sudden upward movements in the price of oil is still existent, particularly in the context that the price is influenced by geopolitical tensions, production decisions of major producers, and developments in the global economy," Robinson said.
OPEC members agreed at the end of November to cut 1.2 million barrels a day off their production by January and last weekend was joined by 11 outside nations, including Russia, who pledged an additional daily 558,000-barrel cut. Top OPEC producer Saudi Arabia pledged to cut its production even further if needed.
The curtailment of supplies is expected to drive up the price of oil on the global market.
Jamaica's first hedge contract, which it purchased from counterparty Citibank NA, provides coverage for eight million barrels of crude oil imports over 18 months between June 2015 and December 2016 at an average strike price of US$66.53 per barrel. Citibank was paid approximately $3.3 billion (US$27.9 million) in premiums.
INFORMED BY TREND
The contract was informed by a trend that saw crude oil prices dip from more than US$100 a barrel in 2014 to below US$50 a barrel, with the Jamaican authorities anticipating that it might have climbed back to US$75-US$80 per barrel on the world market during the course of last year.
However, as US crude stock rose, oil prices remained below US$50 a barrel, inching to just above that price in the past few weeks.
Last Thursday, oil prices stabilised at just above US$50 a barrel as the prospect of a tighter supply market in 2017 offset a sharp decline in crude price earlier following Wednesday's announcement of a US interest rate increase.
When Jamaica purchased two oil hedging contracts in June 2015, it was the Jamaican Government's first such undertaking and resulted from a policy decision to manage the country's exposure to a predicted spike in oil prices from lows of about US$40 per barrel reached earlier that year. It purchased a third contract in July 2015.
The fall in world prices since 2014 boosted Jamaica's balance of payments position due to a lowering of the oil import bill.
The hedging contracts were financed from a special consumption tax of $7 per litre on petrol implemented in March 2015. It was slated to raise about $6.4 billion to pay for insurance against the upward movement in oil prices.
The hedging arrangement meant that if the price of oil exceeded the strike price, Citibank would pay the Government the difference between the strike price the market price times the number of barrels imported for the period. If the price remained at less than the strike price, and so far it has, no payment is made by the counterparty.
In October, Financial Secretary Everton McFarlane told Parliament's Public Administration and Appropriations Committee that legislators would be asked to approve funds to extend the hedge as no provision was made in the 2016-17 Budget approved in May.