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Monday, 1 July 2019

Egypt plans fuel hedging for FY2019-2020, confirms hedging took place in FY2018-19

Government plans fuel hedging for FY2019-2020, confirms hedging took place in FY2018-2019: Egypt is planning to hedge against rising oil prices for the second year in a row, Finance Minister Mohamed Maait said in an interview last week, Bloomberg reports. This comes two weeks after a government source told the press that the finance and oil ministries were negotiating new fuel hedging contracts for the new fiscal year. An informed source told Bloomberg that JP Morgan and Citibank provided the current contracts. The government is considering hiring additional banks in FY2019-2020, the source added.

This is the first official recognition that the government has completed a fuel hedging program. Much of what we know about fuel hedging has come through anonymous government sources, with the ministry never directly confirming or denying the information. We were told last year that the government was in talks with two banks (believed to be JP Morgan and Citibank) to sign contracts for FY2018-2019. These plans appeared to be shelved after crude prices fell below the USD 67/bbl Egypt had projected in its yearly budget. However, an official told us in February that the government was once again thinking about entering into hedging contracts, this time during FY2019-2020. Budget figures then revealed in April that the government had indeed purchased hedging contracts in the last fiscal year.

How much are the contracts worth? The exact details of the programs are unknown, but an analysis of market activity cited by Bloomberg indicates that we may have purchased call options (a contract allowing the holder to buy fuel at a predetermined price) at around USD 70/bbl for December 2019, along with several maturities in 2020. It also looks likely that we took part in large trades booked using fence structure (which sets up a range around a commodity) for USD 50-70/bbl. It is not clear how much of this trading activity is linked to Egypt, Bloomberg notes.

Egypt remains a net importer of oil and is especially vulnerable to price increases: A Bloomberg analysis last year showed that every USD 1 increase above the budgeted oil price of USD 67/bbl added EGP 4 bn (USD 222 mn) to the state’s annual outlay, putting additional pressure on the government as it sought to reach its budget deficit target of 8.4% for FY2018-2019. This year’s budget uses a benchmark price of USD 68/bbl.

Hedging against wheat remains unlikely for now: Maait confirmed that Egypt decided not to hedge against global price fluctuations in wheat in FY2018-2019, and that it is unclear whether we will do so for FY2019-2020. Egypt is the world’s largest importer of wheat.

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