Lanka’s first oil hedge against price instability

Standard Chartered in ground-breaking role:

Hiran H. Senewiratne

HEDGING: World crude oil prices are likely to increase next month with the conclusion of the Chinese New Year. Therefore it would have a direct impact on local petroleum prices, Ceylon Petroleum Corporation (CPC) Chairman and Managing Director Ashantha de Mel said.

China is the largest consumer of petroleum products and are celebrating their New Year this month. Therefore, most industries are not operative in full swing, which influenced a slash in the oil prices at around US$ 60 per barrel.

According to de Mel there is a high probability of local oil prices increasing during March and the Government is taking many precautions such as hedging to cushion the impact.

The CPC Chairman addressing the media conference noted that in efforts to maintain the price of petroleum products and minimise the impact of escalating prices on the economy CPC made hedging arrangements with the Standard Chartered Bank.

It noted that flexibility and quick manner in which Standard Bank has responded and was working in addition to being persistent qualified the bank to be selected for oil hedging, he said.

Initially they will make hedging arrangements for 150,000 crude oil barrels per month besides looking at its workability. They intend making hedging arrangements with a few more banks to purchase another 300,000 barrels in the future.

At present Sri Lanka imports 900,000 crude oil barrels from Oman at US$ 55 per barrel which is a little less than normal international prices. This is the first oil hedge to ensure stability in a sector that is prone to price fluctuations.

The cap strike at the upper limit is US$ 72 while the lowest is US$ 67.50, with Standard Chartered Bank picked to transact the country’s first oil hedge.

This is carried out with the CPC, which hedges their exposure to diesel for a quantity of 150,000 barrels per month for a period of three months, starting March 1, de Mel said. CEO- Standard Chartered Bank, Clive Haswell said that the Bank is delighted to structure the first commodity option in Sri Lanka.

In December the Bank structured Sri Lanka’s first USD option clearly indicating its capability and leadership in introducing innovative new products in the local market.

“As a leading international bank with a long heritage and presence in Sri Lanka we are firmly committed to working with regulators and industry leaders to make Sri Lanka on par with other big regional financial markets and in playing a pivotal role in contributing to the development of the country, Haswell said.