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Has oil bottomed out?

March 29, 2016 Webmaster

ANGRA DOS REIS, Brazil —Â In this September 22, 2010 file photo, workers stand by the construction of Petrobras oil platforms in the BrasFels shipyard in Angra dos Reis, Brazil. Brazil’s State-run oil company reported on Monday a record quarterly loss due to a large reduction in some of its assets amid lower oil prices.

Energy stocks and energy-related bonds have had a rough ride over the past year and a half after outperforming considerably over the last decade.

The reason for the decline was simple: the sharp decline in oil prices from over US$100 a barrel to just above US$40 currently.

WTI crude, which was at a high of US$96 in June 2014, is currently trading at US$40 a barrel for a 58 per cent drop, while Brent crude which traded as high as US$107.75 in June 2014 fell 62 per cent to be trading around the US$41 level.

The slide began due to significantly increased supply of US oil production, as hydraulic fracturing was able to retrieve oil from previously difficult to get at locations, as a result of improved drilling technologies. The combination of high oil prices and low interest rates, emanating from Central Banks’ accommodative monetary policies, made such projects economically viable. Consequently, US oil production increased 80 per cent from 2008 through 2014, according to one estimate.

Crude oil inventories in storage at Cushing, Oklahoma, the largest storage hub in the US, increased from 20 million barrels in the middle of 2014 to just below 70 million presently. In addition, on the demand side, slower growth in demand from China seemingly played a significant role in prices declining.

Finally, there was quite a bit of feeling that the high price of oil merely reflected trading and speculation, and that the whole situation would unravel at some point as fundamentals declined. In this case, the catalyst was OPEC’s strategy to increase production in an already oversupplied market to protect market share and ultimately force production cuts from non-OPEC sources as the price plunge continued.

Oil prices fell in excess of 30 per cent in 2014, 40 per cent in 2015, and by mid-February 2016 had plunged by a further 30 per cent, trading in the mid-20s, but have since rallied some 50 per cent to around US$40 a barrel currently. So what’s next for oil? While it’s difficult to predict the future, a continued recovery or at least stability in oil prices, should persist as supply and demand dynamics come back into balance.

Oil slumped to a 12-year low this year on protracted excess supply concerns before rising on speculation that stronger demand and falling US output, coupled with talks of a production freeze between OPEC and Russia, would ease the global surplus. Additionally, there’s the potential for supply shocks in the future after energy companies from Chevron Corp to BP Plc cut billions of US dollars in spending amid the price crash, according to the International Energy Agency (IEA).

Support for oil on the demand side should come from the observation that oil demand tends to go up over time. Global demand for oil, according to an economic estimate, increased from 75.9 million barrels per day in 2000 to 94.2 million barrels per day in 2015 and is expected to rise to 95.6 million in 2016.

The IEA recently expressed the view that oil prices had reached their bottom, given recent developments on the supply side of the equation in particular and improving outlook on the demand side.

OPEC also is apparently anticipating average oil prices of US$50.00 for 2016. It has become increasingly apparent that given the difference fracking has made in increasing available supply to the United States, we will not see US$100 a barrel for a long time — perhaps never again as we begin a slow but likely definite transition to cleaner fuels.

As oil prices continue to rise, look out for more lucrative buying opportunities in some still beaten-down energy assets — but as usual be sure to consult with your investment advisor to ensure that your selections are right for you.

Jamaica Observer

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Oil Price Appears To Have ‘Bottomed Out’, Says Energy Agency

March 15, 2016 Webmaster

The organisation that represents major oil-consuming nations said Friday that signs of a market that has “bottomed out” are emerging.

US crude prices jumped to a high for the year. Brent crude, used as a global benchmark, hit a high for the year Tuesday and rose one per cent Friday.

Energy companies have been shutting down rigs and laying off thousands of workers as oil prices plunged to around US$30 per barrel, from well over US$100 per barrel just two years ago.

A broad retreat by the energy sector played out again last Friday on both fronts.

The number of oil and natural gas rigs active in the US fell for the 12th consecutive week, according to Baker Hughes on Friday, to 480. That’s the lowest level in decades, and perhaps the fewest since the earliest days of the oil drilling industry.

And Texas driller Anadarko Petroleum Corp. said that it would cut 1,000 workers, 17 per cent of its work force.

The pain at Anadarko and other energy companies may finally be translating into a reduction of a massive and global oversupply of oil, the International Energy Agency said Friday.

OPEC production tumbled by 90,000 barrels a day last month, the IEA said. US production that had surged due to new drilling technology, is expected to fall by almost 530,000 barrels a day this year, according to the IEA.

The Paris organisation, however, said that the recovery in crude prices in recent days from multiyear lows does not mean that there will be a significant and sustained rebound in the short-term. There have been sharp declines in demand, particularly in the United States and China, it said.

China, the world’s second-largest oil consumer, is attempting to quell anxiety over a slowing economy and labour unrest. Earlier this month, it cut its growth expectations for the year.

Goldman Sachs said last Friday that production is unlikely to increase in the US until 2017, and that prices could volatile in the next few months.

Analysts with Goldman said that if US drillers ramp up production with any rise in oil prices, “we believe a self-defeating rally in oil prices/equities could result.”

The report buoyed stocks of energy companies last Friday, making the sector the second-best performer on the Standard & Poor’s 500 index.

In the energy markets on Friday, US crude added 66 cents, or 1.7 per cent, to US$38.50 per barrel on the New York Mercantile Exchange. Brent crude, which is used to price international oils, gained 34 cents, or 0.8 per cent, to US$40.39 a barrel and natural gas gained 3.4 cents to US$1.822 per 1,000 cubic feet.

Gleaner

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Nigeria backs efforts to ‘stabilise’ oil market

February 25, 2016 Webmaster

RIYADH, Saudi Arabia (AFP) — The Nigerian and Saudi leaders yesterday supported efforts to stabilise the oil market but Africa’s top producer did not commit to a production freeze.

After talks in the Saudi capital Riyadh, Nigeria’s President Muhammadu Buhari and Saudi King Salman “committed themselves to doing all that is possible to stabilise the market and rebound the oil price,” Buhari’s office said in a statement.

Buhari was in Riyadh a week after Saudi Arabia, Russia, Venezuela and Qatar agreed at talks in Doha to freeze production at January levels in a bid to stem the dramatic fall in oil prices.

The agreement is conditional on other major producers joining in, as oil heavyweights seek to ensure others not to take advantage of output limits to win market share.

The statement after yesterday’s talks made no mention of Nigeria joining the freeze but analysts say the OPEC member is likely to eventually support the move.

The official

Saudi Press Agency also reported that talks between Prince Abdulaziz bin Salman, the Saudi deputy oil minister, and his Nigerian counterpart, junior oil minister Emmanuel Ibe Kachikwu, focused on “the best way for (market) stability” and “the cooperation of producing countries inside and outside OPEC” to achieve this.

Saudi Arabia and its gulf allies in the Organisation of Petroleum Exporting Countries had been refusing to limit or reduce production, leading to a supply glut that has seen prices fall by 70 per cent since mid-2014.

Poorer OPEC members, including Nigeria, have been hard hit by the price drop but even the wealthy Gulf states have been forced to adopt austerity measures to cope with falling oil revenues.

“I wouldn’t be surprised to see them voice their support to the freeze agreed in Doha,” Abhishek Deshpande, lead oil market analyst at Natixis in London, said of Nigeria.

But he said that unless Iraq and Iran also commit to limit production such talks “carry very little weight”.

The two countries are OPEC’s second- and third-largest producers.

Iran, returning to world markets as sanctions are lifted under its nuclear deal, has insisted on boosting production to pre-sanctions levels.

“Some neighbouring countries have increased their production over the years to 10 million barrels per day and export this amount, then say let’s all freeze our oil production,” Oil Minister Bijan Zanganeh said yesterday.

“They freeze production at 10 million bpd and we freeze at 1 million bpd. This is a very funny joke.”

Saxo Bank analyst Christopher Dembik told

AFP that Nigeria’s position is “a bit ambiguous,” supporting the mooted freeze but at the same time wanting to increase its production to respond to domestic market needs.

Nigeria could be crucial

“In the longer term, there is no reason why the country won’t align itself with the position of Saudi Arabia and Russia,” Dembik said.

Nigeria and Saudi Arabia would also discuss their position towards Iran and Iraq, he added.

“Nigeria could have a crucial role in this respect because of its measured position” that Iran and Iraq should elevate their production before envisaging freezes, Dembik said.

“It is probable, then, that Nigeria meanwhile establishes a bridge for negotiations, notably between Riyadh and Tehran.”

According to OPEC’s Monthly Oil Market Report, Iraq produces about 4.4 million barrels a day, followed by Iran at more than 2.9 million.

Saudi Arabia’s output is close to 10.1 million barrels a day, according to January data.

Kachikwu, who is head of Nigeria’s state-run oil firm, also discussed joint oil and gas investments during his meeting with Abdulaziz, SPA reported.

Oil prices nudged higher Tuesday as the two OPEC members met.

US benchmark West Texas Intermediate crude for delivery in April was up one cent at US$33.40 a barrel. Brent North Sea crude for April rose 18 cents to US$34.87 compared with Monday’s close.

After the Saudi visit, the Nigerian delegation was to travel to Qatar for more oil talks.

Jamaica Observer

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Four Oil Producers Offer To Freeze Oil Output

February 17, 2016 Webmaster

Oil powerhouses Russia and Saudi Arabia joined Qatar and Venezuela in pledging Tuesday to cap their crude output if other producers do the same, aiming to halt a slide that has pushed oil prices to their lowest point in more than a decade.

The decision followed an unexpected closed-door meeting involving the four countries in the Qatari capital, Doha, and reflects growing concern among big producers about the effects the slump poses to their domestic economies.

Russian Energy Minister Alexander Novak said in a statement issued after the meeting that the four countries would be ready to cap production based on last month’s output levels if others join.

“We are ready to maintain, on average in 2016, the level of oil production of January 2016 and not exceed it,” he said in a subsequent statement.

Whether the plan is enough to put a floor under prices is uncertain. The proposal depends on cooperation from a range of producers with differing budget priorities all scrambling for market share since prices began falling in summer 2014.

Among the hardest to bring on board will likely be Iran. It was noticeably absent from Tuesday’s gathering even though it shares control of a major underwater natural gasfield with fellow OPEC member Qatar.

Iran is eager to ramp up its exports now that sanctions related to its nuclear programme have been lifted, saying recently it aims to put another 500,000 barrels a day on the market. Figures from the International Energy Agency show that it pumped 2.9 million barrels daily in December, before sanctions were lifted.

Iran’s petroleum minister, Bijar Namdar Zangeneh, signalLed the Islamic Republic has no intention of giving up its share of the market. He acknowledged that global markets are “oversupplied,” but said Iran “will not overlook its quota,” according to comments carried by his ministry’s Shana news service.

Venezuelan Oil Minister Eulogio Del Pino heads to Tehran next for talks with his Iranian and Iraqi counterparts today, Wednesday.

“The key OPEC members that need to take part are Iran and Iraq, where the big increases are likely this year, but there are big doubts over whether this can be achieved,” Barclays analysts Miswin Mahesh and Kevin Norrish said in a research note.

Efforts to make the plan work are complicated by deep levels of distrust between regional rivals Saudi Arabia and Iran, which has built close ties to Iraq’s government in the years since the 2003 US-led invasion.

The two countries are in opposing camps in regional disputes from Yemen to Syria. Last month, Sunni-ruled Saudi Arabia cut diplomatic ties with Shiite powerhouse Iran after the Saudi embassy and a consulate were torched by Iranian protesters angry over the kingdom’s execution of a prominent Shiite cleric.

Speaking to reporters after the meeting, Saudi Oil Minister Ali Naimi said producers would continue to assess the state of the market in the months ahead. He described freezing output at January levels as an “adequate” step for now.

All of the countries at Tuesday’s meeting, except Russia, are part of OPEC. Saudi Arabia dominates policymaking within the 13-member bloc of oil-producing countries, which has refused to cut its official production targets. Doing so could bolster faltering prices.

The aim of OPEC’s keep-pumping strategy has been to attempt to ride out the 12-year lows in prices and force higher-cost producers, including shale drillers in the US, out of the market.

The bloc collectively pumped 39 million barrels of crude and natural gas liquids a day in December, or about two out of every five barrels globally. Russia pumps around 11 million barrels a day.

After rising soon after the meeting, a barrel of benchmark New York crude was trading down 35 cents at US$29.09 by midmorning in New York. A barrel of Brent, the international standard, fell 59 cents to US$33.42.

The Gleaner

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PSOJ Backs Oil Hedge Strategy

February 3, 2016 Webmaster

The Private Sector Organisation of Jamaica (PSOJ) says it is in the country’s best interest to further hedge against the upward movement in the price of oil, a strategy the Government first adopted in June last year.

The hedge purchased by Jamaica last year at a strike price of US$66 has come in for criticism because oil prices are currently falling, and analysts are predicting further decreases this year.

However, PSOJ president William Mahfood said if the world crude prices remain low for an extended period, the options to buy will also be reduced and gives Jamaica an opportunity to hedge at concomitantly lower prices.

“We feel strongly that if the strike prices are attractive and if prices are maintained at these lower levels that it is in the country’s best interest to buy that insurance policy going forward,” Mahfood told Wednesday Business.

Asked if the PSOJ would encourage the Government to negotiate any differently in entering into such contracts, Mahfood, while noting that “it’s really a function of time, and it’s a question of volatility,” emphasised that “if oil prices remain low for an extended period of time, what you will find is that the option prices will come down, and if those prices come down further, it will definitely be in the country’s interest for us to hedge further”.

While some projections are for prices to fall to US$20, Mahfood said that no one knows exactly where they will end up.

“The best analysts in the world will tell you that the oil price might be a US$53 in December or it might be at US$100.”

He said the PSOJ feels strongly about maintaining some sort of stability in terms of the prices, given what the impact the lower costs have had on the economy in terms of energy which has, for example, resulted in lower electricity bills for both households and manufacturers.

In a release on Monday, the PSOJ said it has taken note of commentary on the oil hedge strategy Jamaica effected last year by purchasing options to buy eight million barrels of oil, representing about half the country’s annual requirement, at a price of US$66 per barrel.

The total cost of the option, which became effective in June 2015 and expires September this year, was approximately US$20 million.

One argument, the PSOJ said, was that the hedge was a waste of money as oil prices have fallen to US$30 per barrel, and the strike price, where Jamaica would have started to benefit, is US$66 per barrel.

The PSOJ noted that projections last year were for oil prices to recover in 2016 with most expecting it to go past US$66 per barrel and settling at around US$80 per barrel, which at 17 million barrels per year, would have had an annual cost above the strike price of US$234 million.

“If this had happened then we would have saved US$214 million (net of the option cost of US$20m). So for us to even have broken even on the cost of the option, oil prices would have had to go to US$67.20 per barrel (additional US$20 million based on our usage above the strike price),” PSOJ said.

It noted that the hedge is not a contract for supply at the strike price of US$66, but an option to purchase at that price so the only cost would be the US$20 million fee.

“It is also important to note that the amount applied to pay for the hedge was applied while prices were falling, so it was not an additional cost, which was important as it did not reduce already existing consumption spending,” the private sector group said.

“The fact is that we could ill afford oil moving back to US$80 per barrel, and the cost of US$20 million to mitigate a US$200 million risk, like insurance, makes good business sense,” said the PSOJ.

The Gleaner

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Jamaica Stands To Lose If World Bank’s Oil Price Prediction Holds

January 27, 2016 Webmaster

While Jamaica has spent US$20 million (about J$2.3 billion) to hedge against the risk of a sharp increase in oil prices, the World Bank has lowered its forecast for crude oil to US$37 a barrel from US$51 a barrel in its October 2015 predictions.

The bank, in its latest commodity markets outlook, said that oil prices fell by 47 per cent in 2015 and are predicted to decline, on an annual average, by another 27 per cent this year.

If the World Bank’s prediction prevails, it would mean that Jamaica would take a hit, given that its hedging contract, with a strike price averaging US$66.74 per barrel, started in June 2015 and is set to expire in about September this year.

Lower oil prices, as well as the ongoing economic adjustment under Jamaica’s economic support programme with the International Monetary Fund (IMF), have been attributed to the macroeconomic stability which the fund’s executive board reported last month has continued to strengthen.

Those factors have also been credited for the inflation and the current account deficit falling to historical low levels.

In the report released yesterday, the World Bank said the lower forecast for crude oil reflects a number of supply-and-demand factors.

These include sooner-than-anticipated resumption of exports by the Islamic Republic of Iran, greater resilience in United States production due to cost cuts and efficiency gains, a mild winter in the Northern Hemisphere, and weak growth prospects in major emerging market economies, according to the World Bank’s latest quarterly report.

However, from their current lows, a gradual recovery in oil prices is expected over the course of the year, for several reasons.

“First, the sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply, and is likely to partly reverse,” the report said.

“Second, high-cost oil producers are expected to sustain persistent losses and increasingly make production cuts that are likely to outweigh any additional capacity coming to the market. Third, demand is expected to strengthen somewhat with a modest pick-up in global growth,” it added.

The anticipated oil price recovery is forecast to be smaller than the rebounds that followed sharp drops in 2008, 1998, and 1986.

PROSPECT

“Low prices for oil and commodities are likely to be with us for some time,” said John Baffes, senior economist and lead author of the commodities markets outlook. “While we see some prospect for commodity prices to rise slightly over the next two years, significant downside risks remain.”

In the IMF report submitted to the board for the 10th review in December, the Jamaican authorities also observed that despite increased surrendering requirements since the beginning of last year and reduced foreign exchange demand from public enterprises, given lower oil prices, there has not been any trend increase in the central bank’s net foreign exchange purchases. “Indeed, net purchases were negative in September and October 2015,” it added.

When Jamaica purchased hedging contracts from Citibank NA, covering six million barrels of oil imports over a 15-month period, expectations last year were that crude prices may climb back to US$75-US$80 per barrel on the world market.

However, prices have since fallen to just over US$30 a barrel.

The transaction was the Jamaican Government’s first oil-hedging arrangement, resulting from a policy decision to manage the country’s exposure to a predicted spike in oil prices from lows of about US$40 per barrel reached earlier in 2015.

The fall in world prices since 2014 has boosted Jamaica’s balance-of-payments position due to a lowering of the oil import bill – crude imports total nine million barrels per year – even as it threw tax revenue collections off-target due to lower special consumption tax receipts from the state refinery Petrojam.

Jamaica imports about nine million barrels of crude oil per year.

A new Energy Stabilisation and Energy Efficiency Enhancement Fund (ESEF) has been introduced to, among other things, finance the purchase of the hedging instruments.

Legislation and regulations governing the use of the ESEF are expected to be adopted by February this year, ahead of the parliamentary debate for the fiscal year 2016/17 Budget.

The Gleaner

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As oil glut hits, GOJ oil hedge for 2016 set at US$65.90 strike price

January 22, 2016 Webmaster

The Bank of Jamaica (BOJ) indicated on Wednesday that to date, the Government of Jamaica (GOJ) has spent US$27.87 million or J$3.2 billion on oil hedge contracts. In total, five contracts have been signed with Citibank covering periods up to December 2016.

For the current period, the contract runs from January 2016 to December 2016 with a strike price of US$65.90.

The strike price means that Jamaica will begin to receive payouts if the price per barrel of crude hits that mark or exceeds it.

Some analysts to whom the Jamaica Observer have spoken say that it is clear a better deal could have been struck had the Government waited a while before spending money for the hedge in 2015, but they also note that it could not have been predicted that oil prices would continue to slip downwards to the extent to which they have.

Earlier this week, benchmark crude prices fell to their lowest since September 2003 on worries about a global glut.

A new drop came Tuesday after the International Energy Agency, which advises industrialised countries on energy policy, used the alarming term “drown in oversupply” in relation to the oil markets of 2016. The market has begun to react to plans by Iran to ramp up supplies to regain market share.

The West Texas Intermediate index slid 2.3 per cent to US$27.80 per barrel of crude on Tuesday, while Brent slipped 2.3 per cent to US$28.09 per barrel.

On Wednesday the downward spiral continued with Brent Crude down 5.2 per cent at US$27.28 a barrel, while WTI sunk 6.6 per cent to US$26.59.

Analysts note that oil price has plummeted 75 per cent since mid-2014 as oversupply, mainly due to US shale oil flooding the market, has driven down the cost, even while a slowdown in economic growth in China and Europe has cut demand.

Locally, technocrats had suggested a return to US$70 per barrel by year end 2016, a prediction informing the decisions by the GOJ technical committee set up to manage the hedges. The technical committee is chaired by Michael Hewitt of Petrojam and has representatives from the BOJ, the Ministry of Finance, and Development Bank of Jamaica.

One analyst in Kingston, who spoke on condition of anonymity, commented, “To be honest, hindsight is 20/20. We could not have anticipated the current prices. It is easy to say the obvious, which is that if we had waited we could have got a better deal, in the form of a lower premium. In fact, it is obvious, based on where things are, the hedge (for contract periods already covered) was not needed.”

The BOJ informed the Caribbean Business Report that the GOJ is prepared to write new contracts for the period beyond 2016, before year end.

Funds already spent on hedging, provided for in the FY2015/16 budget, were paid out of the Consolidated Fund to facilitate the upfront purchase of the hedge contracts, the central bank stated.

It said that the advance is now being repaid from the proceeds of the new special consumption tax introduced in March 2015 to pay for the hedge.

The amount paid out so far is only about half of what the Government plans to raise from the SCT of $7 per litre on petrol — about six US cents per litre — which is expected to fall in the ball park of $6.4 billion by year-end.

The five existing contracts for hedging are all with Citibank which was the successful bidder for that round of contracting.

Periods covered by the contracts range from June 2015 to May 2016 (two contracts) with a weighted average strike price of US$66.55; and September 2015 to August 2016 (two contracts) with a weighted average strike price of US$66.80. The last is the contract for January 2016 to December 2016 with a strike price of US$65.90.

Regional governments have been eyeing hedging as a new strategy to protect against changes in the price of crude. Mexico, which hedged against a fall in prices, collected US$6 billion under hedge contracts in 2015.

Jamaica Observer

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Government Oil Hedge Underwater

January 15, 2016 Webmaster

Gov’t oil hedge underwater

In June 2015, the Government of Jamaica booked a hedge transaction to buy six million barrels of oil for delivery 15 months later at a strike price of US$66.74.

The mechanism used in this kind of transaction is called a ‘call option’, which gives the purchaser of the option the right, but not the obligation, to purchase the asset at a specified price the ‘strike price’ within a specified time. A month later, it bought another 15-month futures contract for two million barrels of oil and the average strike price of the two contacts is US$66.53.

We paid about $30 million to Citibank for the privilege of placing this bet on oil prices going higher than our strike price in 15 months.

When these contracts to buy crude oil were booked, prices on the world market was trading at about US$63 a barrel and had rebounded from about US$45 in January 2015. The government placed a bet based on its belief that crude oil prices would continue to rise well above the $66.53 strike price. If that were to happen and oil prices were to increase to, say, US$80-US$90 per barrel, the Government would be in the delightful position of having to pay only about US$66.53 per barrel for oil that would be trading at the much higher spot price on the international commodity market. The Government of Jamaica, senior executives at the Bank of Jamaica, and members of the oversight and technical committees created by the Government to manage the hedges, all seem to have bought into the belief that oil prices would climb higher than US$67 before the expiry date of the options.

The oversight committee is comprised of the financial secretary, Devon Rowe; the governor of the Bank of Jamaica, Brian Wynter; the managing director of the Development Bank of Jamaica, Milverton Reynolds; the managing director the Petroleum Corporation of Jamaica, Winston Watson; and Dr Vincent Lawrence. Mr Watson is known to have experience in oil trading and markets. Only Michael Hewett, an executive at Petrojam, was named as a member of the technical committee.

Wrong direction

One has to believe that the intention of the members of the government-appointed committees and all of those involved in the hedge transaction was a good one to try and protect Jamaica against that time in the 15-month period when oil prices might spike above US$67. While there is still considerable time to the maturity of the call options, right now the bet is not looking good and the best projections are for oil prices to fall even lower than the below-US$30 they traded at this week.

This week, three important financial institutions released projections indicating that oil prices could fall to US$10-US$20 per barrel and stay there for sometime. Goldman Sachs’ projection was at US$20, Morgan Stanley’s was US$20 and Standard Chartered, a bank with strong roots and connections in the Middle East and Asia, projected US$10 a barrel oil.

In the futures trading business, which is where these call options reside, when an option is bought with the expectation that the price of the commodity will increase but the opposite occurs, the option is said to be ‘underwater’. Given that these options were booked with the expectation for oil price to rise above US$66, and they are now heading in the direction of US$20, Jamaica’s call options on oil are seriously underwater.

A better alternative

In November 2014, a public official asked me about hedging because someone had written him an email to encourage Jamaica to hedge oil transactions on the upside, based on a scenario the email writer concocted about the state of affairs in the international oil industry. The public official was aware that I had traded oil futures for many years and had lived in the Middle East for more than two decades. I share below an excerpt from my reply:

“The recommendation needs study because taking a position means the Government and Jamaica will be guessing the direction of the movement of the price of this commodity. The writer makes it sound like making money on these bets (options) is a sure thing. It is not.

“There is always a risk. Suppose we bet on a certain price increase in a specific time frame, which we would have to if we are going to hedge, and prices instead of rising to, say, US$70/bbl from US$50 falls to US$35/bbl during our hedge horizon, we would suffer an important loss depending on the size of the contract. This is what apparently happened to that forward position Jamaica took on that futures contract on aluminium with the Russians and/or Glencore, the debilitating result of which you are very familiar.

“When oil went to US$9/bbl in the 1990s, if you had dared to tell anyone about the US$147 per barrel price which occurred in July 2008 they would have declared you mad. It’s a commodity; any card can play. On review, if the writer sees the prices as going one way, down, and OPEC is ‘dead’, why hedge? Do nothing, stay addicted to imported oil and go for the lovely ride to low-oil-price nirvana.

“The better alternative is to wean ourselves off the 98 per cent dependence on petroleum-based fossil fuels for our energy supplies. We really need to develop and use renewable energy from many sources, including bagasse, garbage, wind, water and solar.”

Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the Economic Advisory Council of the leader of the opposition.

The Gleaner

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No problem with PetroCaribe agreement after Venezuelan election results, says Petroleum Corporation of Jamaica boss

December 9, 2015 Webmaster

No worries for Ja over electoral change in Venezuela — PCJ

Up to November, Venezuelan president Nicolas Maduro had been promising more under the PetroCaribe programme to Caribbean countries, announcing more resources for the eastern Caribbean.

Now, following the parliamentary victory by Democratic Unity Roundtable (MUD) some expect that changes may be in the offing.

The PetroCaribe programme is an agreement between Venezuela and some Caribbean territories to purchase oil on preferential terms. It allows the Government of Jamaica (GOJ) to convert 40 per cent of payments annually to a loan repayable over 25 years.

The funds flowing from the arrangement are managed by the PetroCaribe Development Fund (PDF).

Despite the debt buy-back executed this year, Jamaica is still heavily reliant on PetroCaribe funds for low-cost budget support.

In July, Venezuela allowed the GOJ, based on the net present value of the debt outstanding at December 2014, to purchase the PetroCaribe debt totalling US$3.2 billion for US$1.5 billion.

But the Ministry of Finance and Planning still remains the fund’s largest borrower.

Some analysts have posited that the escalating budget constraint faced by the Venezuelan government could trigger a drastic amendment of the PetroCaribe arrangement.

However, chairman of the Petroleum Corporation of Jamaica (PCJ) and advisor to the Ministry of Science Technology Energy and Mining (MSTEM) Christopher Cargill says he expects to see business as usual.

“The election was a parliamentary victory. It was not the national election which is due in 2019. No change can be executed to PetroCaribe before the national elections,” Cargill explained.

He said that in retrospect, Jamaicans should show appreciation for the decade-old arrangement.

“I think Jamaicans really need to be grateful for the benefits received over the years,” he stated, citing the avoided pressure on foreign exchange resources.

Others, including US-based analysts, have projected changes in the offing based upon the effect in Venezuela of declining oil revenues where increasing socio-economic chaos has become evident.

Oil accounts for roughly 96 per cent of export earnings, about 40 per cent of government revenues.

Forecasts have placed oil prices to stay at US$60 per barrel on average due through to 2020 owing to levels of supply from OPEC members and the rapid increase in natural gas and shale oil production.

However, Cargill is convinced that the next three years will hold nothing new for PetroCaribe and its client countries.

He anticipates that a subsidiary of PetrÃ³leos de Venezuela (PDVSA) will move ahead to honour its promises to upgrade the Petrojam refinery which it partially owns, a move expected to make the company more competitive regionally.

Jamaica, in 2006, signed an agreement with Venezuela through PDV Caribe, a subsidiary of PDVSA for a 49 per cent stake in Petrojam with a subsidiary agreement to move production from an average of 30,000 to 50,000 barrels of petroleum products per day through expansion.

At last report, PVDSA was reviewing proposals received for the upgrade of the petroleum refinery from two Chinese sources.

The refinery currently supplies about 80 per cent of the local non-bauxite market and 70 per cent of the national market.

A 2008 estimate put the project cost for expansion at US$758 million, funds that Jamaica lacked and which Venezuela has been unable to deliver to date.

Jamaica Observer

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Oil prices linger near seven-year lows

December 9, 2015 Webmaster

SINGAPORE, Singapore (AFP) — Oil prices hovered near their lowest in almost seven years in Asia yesterday, ahead of the release of US crude inventories and expectations of an increase in US interest rates.

The decision by the (OPEC) oil producers grouping last week to maintain its lofty production levels continues to weigh on a market already awash with supplies as traders fix their sights on other developments that could influence prices.

US benchmark West Texas Intermediate (WTI) for January delivery was up 16 cents at US$37.81 and Brent crude for January was trading 26 cents higher at US$40.99.

WTI fell 5.8 per cent to US$37.65 in New York and Brent tumbled 5.3 per cent to US$40.73 in London yesterday, their lowest levels since February 2009.

Analysts said yesterday’s slight rebound reflected some bargain-hunting ahead of the release on Wednesday of US commercial crude stockpiles, which will help gauge demand in the world’s top oil consumer.

A Bloomberg News survey estimated inventories probably rose for an 11th week, indicating softer demand.

Traders are also closely watching a meeting of the US central bank’s Federal Open Market Committee (FOMC) next week amid expectations members will announce the first interest-rate hike in over nine years.

An interest-rate increase typically boosts the dollar, which would make dollar-priced oil more expensive to holders of weaker currencies. That usually leads to lower demand and softer prices.

“We expect the FOMC to begin the process of adjusting rates at its meeting… but we think only a gradual and limited adjustment of short-term interest rates will be needed to meet the FOMC’s macroeconomic objectives,” Nomura Securities said in a market commentary.

Oil prices have plunged from peaks above US$100 a barrel in June last year, largely due to the supply glut.

OPEC countries are currently producing an estimated 32 million barrels per day, above the group’s prior 30 million barrel target.

Jamaica Observer

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