The Ministries of Finance and Petroleum began preparations to review hedging contracts against rising oil prices in the world at the beginning of the second quarter (Q2) of the current fiscal year (FY) 2019/20, at a price below about $65 a barrel the government set in Q1 of FY2020.
A government source told Daily News Egypt that the government is reviewing the expectations of changing the price of a barrel of oil on world markets, after a sudden decline during Q1 of FY2019/20.
He pointed out that the price of an oil barrel has fallen below $60 since the beginning of last month, affected by political fluctuations in the region, contrary to the expectations of the market and international companies based on studies on the direction of the value of a barrel of oil during the coming period.
The FY 2019/20 budget indicated that the introduction of the hedging mechanism aims to protect the budget for the current FY from the financial risks resulting from fluctuating global oil prices and to reduce any negative effects on the subsidy bill.
The reduction of subsidies of petroleum materials in the new budget project reached EGP 36.112bn. The government allocated subsidies of EGP 52.963bn, compared to EGP 89.075bn in the budget for the current FY 2018/19.
The reduction was about 40.5%, and a reduction of EGP 35.476bn from the expected results, and the government explained that the fuel subsidy was calculated based on the average price of Brent crude oil at $68 a barrel.
The source explained that the government has contracted to review the hedging price of the rise in the value of a barrel of oil every three months with investment banks JP Morgan and Citibank to agree on the price of the barrel and renew the hedging contract with banks.
He pointed out that the government renews the agreement to apply the hedging mechanism from the rise in the prices of oil shipments during the FY 2019/20, to protect the budget from financial risks resulting from fluctuating oil prices globally.
The latest global estimates indicate that global oil prices will stabilise in 2019 at levels between $65-70 a barrel according to future oil purchase prices and the International Monetary Fund projections, unlike in global markets conditions due to political volatility, the finance ministry said in its financial statement.
