The government plans to renew the agreement on the implementation of the oil hedging against the high prices of crude oil during the next fiscal year (FY), to protect the budget of FY 2019/20 from the financial risks resulting from the fluctuation of global oil prices.
The Minister of Petroleum and Mineral Resources, Tarek El-Molla, told Daily News Egypt that the oil hedging mechanism has been applied in the current FY, to cover any rise in prices above $70 per barrel.
These oil hedging services would allow the government to buy crude oil over a long period of time at a fixed price in order to avoid the uncertainty in the international market.
He added that the agreement will end on June 30 and that it aims to renew it in order to secure the fuel subsidy budget in FY 2019/20 from the risks of oil price fluctuations in the markets.
The draft FY 2019/20 budget indicated that the implementation of the hedging mechanism aims to protect the current FY from the financial risks resulting from fluctuating world oil prices, and to reduce any negative effects on the subsidy bill.
The latest global estimates suggest global oil prices will stabilise in 2019 at levels ranging from $65 to $70 a barrel, based on oil purchase contracts and International Monetary Fund forecasts, Egypt’s Finance Ministry said in a statement.
The draft state budget for the state FY 2019/20, significantly reduced subsidies for petroleum and electricity.
The reduction of subsidies for petroleum products in the new budget project amounted to EGP 36.112bn. The government allocated EGP 52.963bn, compared with EGP 89.075bn in the current FY 2018/19.
The new draft budget sets the price of Brent crude at $68 per barrel, up from $67 per barrel in the current FY. In the 2017/18 budget, the price of an oil barrel globally was set at $55.
Egypt is highly vulnerable to crude oil price fluctuations, as each $1 increase in the Brent crude’s price would cost the state EGP 4bn, according to the finance ministry.
Last year, the government contracted with investment banks JP Morgan and Citibank to hedge against the risks of rising global oil prices.
The OPEC Secretary General, Mohammad Barkindo, assured in February, that the barrel’s price will not exceed $70, until the next meeting of the OPEC members in April in order to discuss extending the production cut during 2019.
However, the prices of oil in global markets jumped to $73.60 per barrel last week, driven by the US decision to revoke sanction waivers on Iranian oil, and renewal of sanctions onVenezuela, which would cause a reduction in their oil exports.