CBOD proposes special hedging to curtail fuel price increases

The Chamber of Bulk Oil Distributors (CBOD) has suggested to government to pursue arrangements that hedge prices of petroleum products against cash settlements.

This is because the pricing structure in a price deregulated market limits government’s options in insulating the market from major price swings.

“Government, not being the buyer of products, may be unable to hedge against actual deliveries,” CBOD said in its 2017 industry report.

The report, therefore, cautioned that it is imperative for government to adopt smart risk mitigating solutions that will help stabilise prices on the market and mitigate potential abrupt macroeconomic shocks in the face of rising crude oil prices.

CBOD observed that the rollout of this proposal may require legal amendments to the ESLA for increased flexibility on the part of the Minister of Finance to vary taxes as and when crude prices exceed the political and economic crude price threshold (CPT).

Rising crude oil prices

The suggestion is coming at a time crude oil prices are rising, resulting in the increase of prices of petroleum products at the pumps.

Brent Crude Oil Spot Price is at a current level of $74.51, down from $76.60 the previous market day and up from 52.25% one year ago.

Depreciating value of the cedi

Another factor is the depreciating value of the cedi. As of Friday, one dollar was worth GH¢4.70.

Fuel prices

On average, national prices went up 2 per cent, with gasoline and oil selling at GH¢4.66 and GH¢4.65, respectively.

10% increase in transport fares

Last week, a 10% increase in transport fares was announced, mainly attributable to rising prices of petroleum products.

CBOD urged government to identify its political and economic crude price threshold (CPT).

“The CPT will be the crude price at which government considers it necessary to directly intervene or support ex-pump prices.

“The CPT then becomes the strike price in a given hedge programme.

“The hedge programme should be designed to cover significant portions of the country’s consumption,” the report stated.

CBOD explained that the income generated from the hedge should be used to reduce the petroleum tax burden on consumers through the ex-pump price build-up.

In effect, the report noted that when crude prices rise beyond the CPT and government rakes in hedge income, taxes in the pump prices would be reduced to the extent of the hedge income.

“In a situation as this, the crude price increase is expected to increase the ex-refinery prices.

“But with the reduction of taxes, the pump prices will be expected to remain significantly the same, ceteris paribus.

“Of the derivative choices that may be available to government in this structure, we recommend the choice of an option which should be funded using proceeds accrued from the Price Stabilisation and Recovery,” it added.

January 2017 to March 2018 pump prices

An analysis of Ghana’s January 2017 to March 2018 pump prices indicates that at a 1% level of significance, a dollar increase in the price per barrel of Brent crude will result in a three pesewas per litre increase in the pump prices of the country’s most consumed products, gasoline and gasoil.

This level of sensitivity heightens the implications of crude price increase

on the Ghanaian market.

Brent Crude prices

Brent Crude prices started 2018 first quarter at $66 per barrel and ended the quarter at $69.02 per barrel, indicating a 3.5% increase in price.

32% increase in crude prices

It also ended 2018 first quarter at a level 32% higher than it ended 2017 first quarter.

The rally experienced in the crude market and the increased compliance to OPEC’s production cut interventions have inspired upward changes in the projections of major forecasters like Reuters, Bloomberg, Goldman Sachs and other Wall Street majors.

Most projections have suggested a peak between $75 barrels per day and $85 barrels per day while others have projected a possible return to $100 barrels per day.