Transcript Slide 1

NOT AN OFFICIAL UNCTAD RECORD
Risk management strategies that can
mitigate budget exposure to oil price
volatility
Rachid Amui
Energy Analyst,
UNCTAD, Commodity Risk Management, Finance and
Information
11th Africa oil and gas trade and finance conference, 23-25 May, Nairobi,
Kenya
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Overview
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Oil price volatility and price forecasting
Impacts of oil price volatility
Price risk management strategies
The way forward
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Historical crude oil prices - Brent
Cr ude Oil-Br e nt Da ted FOB U $/BBL (~U$ )
FROM 3/5/87 T O 3/5/07 MONT HLY
80
70
60
50
40
30
20
10
0
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Source: DATASTREAM
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Drivers of volatility
• Lack of accurate information on supply, demand,
stocks etc
• Non transparency and predictability of markets
• Tight market-Widening supply/demand gap
• Rapidly rising demand at a time when most
accessible resources are being exhausted
• Uncertain geopolitical environment
• Freak weather
• Mismatch between crude type and existing
refining facilities
• Speculators
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Predictability of oil prices
The herd
instinct among
forecasters
makes sheep
look like
independent
thinkers.
Edgar R. Fiedler
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Impacts of price volatility
Macro
Micro
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Higher inflation and interest rates
Balance of payment problems
Decline in economic growth
Exchange rate volatility
• Higher transport costs
• Economic instability (due to
power cuts etc.)
• Social unrest
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Strategies to mitigate risk
• Stabilisation funds
• Market based risk management
instruments (options, forwards, futures,
swaps, instruments linked with loans)
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Stabilisation fund
Non oil revenues
+
Oil Revenues
Oil revenues
> Target level
Fund
Transfer to
Budget
Budget
Balanced
Expenditure
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Drawbacks of Stabilisation funds
• Resources are fungible
• Act as a capital source for deteriorating budget
balances
• Difficulty in establishing price for accumulating or
withdrawing from fund
• Behaviour of oil prices – Administrative set
benchmarks require large transfers when oil
prices fall
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Hedging using financial instruments
• Hedging principle is governed by a simple
formula:
• Gains/Losses in physical market +
Gains/Losses in financial market = Price
objective
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Options, Futures
• Options: Agreement gives holder the right to buy
or sell an underlying asset – Call/Put
- Similar to insurance
• Futures: Standardized contract allowing holder,
buyer or seller, to accept or deliver a given
quantity of asset at a specified place, price and
time in teh future
- Deposit of good faith required (5-10%)
- Margin calls
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SWAPS
Exchange of cash flows at regular intervals to
another party over predetermined time period
Pays <$40
Producing Country
Importing Country
Pays >$40
Spot price
Spot price
Spot Market
Pays difference to A
Financial Institution
Receives difference
Sells crude at mkt. price
Country A
End Users
Receives market price
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Drawbacks of financial instruments
• Lack of familiarity causes heavy losses
• Lose exposure to beneficial price developments
– Possible large credit exposure if market prices
move in favour of user
• Premiums can be expensive
• Lost of premiums
• Not easy to find counterparties
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Risk management and UNCTAD
• Research and analyis on price risk
management tools
• Training on use of risk management tools
• Awareness and seminars for senior
decision makers
• Advise on the implementation of proper
control sytems when using risk
management tools
Conclusion
• Stabilisation funds will work in combination with
financial instruments and policy measures
• Budget planning can be made better with
financial instruments since income becomes
more predictable and in addition hedging
increases creditworthiness
• Diversify - tap into entirely new sources of
energy for transport, and to build flexibility into
the production system
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Thank You
[email protected]
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