Tue | Jan 22, 2019

BOJ, Ministry of Finance leading oil hedge talks

Published:Wednesday | March 18, 2015 | 12:00 AM
Brian Wynter, governor of the Bank of Jamaica.

Jamaica is raising $6.4 billion to buy insurance against the upward movement in oil prices, but the Ministry of Finance has declined to provide details of the hedging contracts under negotiation.

With the fall in oil prices since last June, Finance Minister Phillips said the treasury has lost about $2.50 per litre in special consumption tax collections.

In order to pay for the hedge and compensate for lost revenues, a new SCT of $7 per litre of petrol, about US 6 cents, will take effect today, March 18.

However, the ministry declined comment on how much of that will be used to hedge oil prices, nor would it disclose the parties involved.

"Details cannot be released at this time," said the ministry's communications and public relations specialist, Elaine Oxamendi Vicet.

Prior to the presentation of the budget, Petroleum Corporation of Jamaica (PCJ), the parent to oil refinery Petrojam Limited, was known to be exploring whether hedging would be a feasible option for the refinery.

However, PCJ chairman, Christopher Cargill, said Friday that while research for the arrangement had been undertaken by that agency, the actual negotiations were conducted and finalised between the Ministry of Finance and the Bank of Jamaica, and overseas counterparts.

no consensus

The cost of crude has fallen more than half since June 2014, and is now trading at a six-year low. Oil settled at US$43.36 and at US$53.51 for Brent on Tuesday.

There is no consensus on the market as to where oil prices will end up, with speculation running the gamut of US$20 to US$30 at the low end to US$75 to US$80 at the top end.

"There is a risk that oil prices will again start to move sharply upwards. This could have a profound negative effect on the balance of payments and our economy, generally," Phillips told lawmakers last Thursday as he presented the 2015-16 Budget.

"Accordingly, the government has taken the decision to purchase a hedge in the market against the risk of a sharp increase in the price of oil," he said.

"This is like an insurance premium. We pay the financial institution for a hedge contract for a specific volume of oil. If the price of oil moves above the contracted price, Jamaica will receive a payment".

Phillips acknowledged that the effect of the new tax on pump prices is an unknown, even as he warned against gas price increases.

"I would hope and expect that market companies and retailers do not the opportunity to change their margins to the disadvantage of the public and the economy," he said.