CPC to hedge oil prices with Citibank help

The Ceylon Petroleum Corporation (CPC) is continuing to resort to hedging to reduce its exposure to price fluctuations in the world oil market.

“The corporation has adapted a structured risk mitigating strategy which includes fuel hedging as it is a technique not by which you will make money but by which you can reduce potential loss,” CPC Chairman Asantha de Mel told a media conference this week.

The CPC has entered into a new 6-month hedging arrangement for 200,000 barrels of fuel with Citibank which has structured a solution for CPC to manage its price volatility and to provide relief in prevailing market conditions for part of its oil imports. CPC has hedged 100,000 barrels of diesel for six months at a fixed price of 81.50 dollars a barrel and a maximum of 90 dollars a barrel with Citibank.

The Corporation bought diesel at a price of 87 dollars per barrel recently after Citibank came in and the bank has reimbursed the balance $5.50. “If the fuel price skyrockets above that price specified by the futures contract, the hedge will have paid off because CPC will save money by paying the lower price. However, if the price goes down, CPC is still obligated to pay the price in the contract and actually would have been better off not hedging,” De Mel said.

At the news briefing, CEO Citibank Sri Lanka Dennis Hussey handed over a cheque of $772,500 to the CPC Chairman who said this would be credited to a separate hedge fund.

Sri Lanka spends $2 billion on fuel imports and this sum would go up to three billion oil prices rise up to $100 per barrel which would be unbearable as the country’s foreign exchange reserves are very low at present, De Mel said.