Parliament to be asked to approve new oil hedge
GOVERNOR OF the Bank of Jamaica (BOJ) Brian Wynter and Financial Secretary Everton McFarlane have come out defending the costly ‘insurance’ Jamaica has taken out against oil prices as the expiration date nears and a new one is being prepared for Parliament’s approval.
Hedging is an investment position used to reduce substantial losses that could be incurred based on actual or perceived fluctuating developments.
Last year June, Jamaica entered an arrangement with Citibank, which covers the period from June 2015 to December 2016, and for which the bank has been paid approximately J$3.3 billion (US$27.9 million) in premiums. The arrangement involved three contracts.
Under the arrangement, Jamaica would get a payout if oil prices exceed US$66 per barrel. Up to yesterday, the West Texas Intermediate crude rate used under the hedge put the latest oil prices at US$51.60 per barrel.
McFarlane told Parliament’s Public Administration and Appropriations Committee (PAAC) yesterday WYNTER that the Parliament would be approached to approve funds to extend the hedge as no provision was made in the 2016-2017 National Budget, approved in May.
“In the coming Supplementary Estimates, we are looking to find the resources so that we’re covered a longer period of time,” he said. He added in a Gleaner interview later that “the details as to the period to be covered and the level of coverage are to be finalised in short order.”
He said the resources would come from budgetary reallocations.
NUMBER OF BARRELS DECLINING
The BOJ Governor also noted that with just two months to go under the last contract, the number of barrels has been declining. “We’re not covering the full monthly amount now. This is the tail end of what was being hedged over a year ago. It’s a little under 200,000 barrels per month, whereas when you’re covering (fully), you’d be up there at about 700,000 or 800,000 barrels per month,” he said. Concerns had been raised that because prices have remained low, Jamaica was losing millions under what some critics held was an unnecessary hedge. PAAC member Franklyn Witter, using similar concerns, questioned whether the risks that gave rise to the hedge still existed. “You have a projection over the medium term for oil to remain within $52 per barrel, so given that projection, why do you think it would be important to continue with the hedge?” See full story online.
Firefighter carry out cooling-down operations after the explosion on Jacques Avenue in the Mountain View area of St Andrew on Sunday.