Islamabad: The Petroleum Division is expected to submit the country’s first-ever hedging plan for oil to the Economic Coordination Committee (ECC) of the cabinet soon, a news source reported. The decision comes following the unexpected drop in oil prices caused globally by the ongoing COVID-19 pandemic.
In this regard, the Petroleum Division has devised a call option-based oil hedging plan for one or two years via selected banks. Sources revealed that this measure would allow the country to benefit from the drop in oil prices in the international market.
The Petroleum Division has worked with the Ministry of Finance over the last month to review the possibilities of hedging a portion of exposure to Pakistan for importing petroleum products directly or indirectly linked to crude prices — including high-speed diesel, CNG, crude oil, and motor gasoline.
The selected banks have advised Pakistan on the basis that the country was considering oil price hedging for the first time ever. They have stated that the country should start from covering 15% or 20% of the exposure. It could increase the coverage later and turn this into an ongoing programme, the banks added.
Given the volatile nature of the oil market, the banks have collectively advised against timing the bottom of the market, and wait for the prices to become more stable.
Under the oil price hedging plan, the Petroleum Division has made the following recommendations:
Approving PSO to be the counterparty and the Finance Ministry to provide guarantee of its performance
One-year call option for 15 million barrels of oil with division into 12 equal monthly amounts and USD 8 strike prices above the current Brent — given that fee remains within acceptable range
Two-year call option for 15 million barrels of oil with division into 12 equal monthly amounts and USD 15 strike prices above the current Brent — given that fee remains within acceptable range
Notifying a committee for finalising call options with the selected banks, along with ECC to provide final approval on a short notice
Providing OGRA with a policy direction about including the monthly price of the option in the oil product’s cost when announcing the monthly prices
As the market prices are changing every day, the ECC is required to provide an approval for the price range of call options presented. This would allow the Finance Ministry to lock the plan the day the banks concerned put an acceptable offer on the table. Otherwise, a fixed price approval would become irrelevant when the market moves the next day.
