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Tuesday, 2 October 2018

Should the FinMin reconsider its stance on fuel hedging?

Should the FinMin reconsider its stance on fuel hedging? Oil soared yesterday to its highest level since 2014, with crude futures rising 2.8% to USD 84.98/bbl as a slowdown in US drilling added to already mounting concerns about an output shortage, according to Bloomberg. Traders see oil could hit the USD 100/bbl mark, especially with the US re-imposing sanctions on Iran, as well as civil unrest in Venezuela, Libya, and Nigeria disrupting supplies. The US continues to push OPEC to ramp up production, but analysts see that marginal increases in output are unlikely to make up for the project supply gap.

A hike is bad news for Egypt, where people are already grappling with high inflation brought on by policy reforms — and where the government is working to narrow its budget deficit and control spending. The Finance Ministry had decided last week to shelve plans to hedge against rallying oil prices, arguing that prices were “manageable.” This came after we heard that the government had reportedly signed fuel hedging contracts with two international banks, widely believed to be JP Morgan and Citibank.

Subsidy cuts to continue: This came as Oil Minister Tarek El Molla confirmed that Egypt was on track to continue eliminating energy subsidies as reform efforts press on, Reuters reports. Speaking at an Arab energy conference in Marrakech, El Molla said oil subsidies had cost Egypt around USD 30 bn over the past five years, adding as well that the availability of subsidized fuel in the past had fostered the creation of a thriving black market. The government raised fuel prices by c.50% at the start of the new fiscal year in July, the third hike since Egypt signed a USD 12 bn extended fund facility agreement with the IMF in 2016. Officials said the cuts allow them to allocate additional resources to social welfare spending. The cuts have helped drive inflation especially as the cost of electricity, water, and transportation were also increased this summer. Annual headline inflation climbed to 14.2% in August, up from 13.5% in July, while monthly inflation eased to 1.8% from 2.4%.

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