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Egypt Buys Huge Oil Contracts To Hedge Against Rising Prices

While oil-producing nations are scrambling to plug budget shortfalls after the price crash, oil importers are benefiting from the low oil prices, and some of them are hedging against higher prices.

Egypt, for example—a net oil importer—has nearly doubled its oil hedges to protect itself against higher oil import costs, Egyptian Finance Minister Mohamed Maait told Bloomberg in an interview published on Wednesday.

“We did a huge number of hedging contracts,” Maait said about the program for the fiscal 2020-2021 ending in June 2021, without giving details about how much it cost Egypt to do that or how much it has hedged.

This is not the first time that Egypt has resorted to buying call options, which give it the right to buy oil at a certain predetermined price. Over the past two years, the country has also hedged against higher oil prices as low costs for fuel, especially if part of the fuel is subsidized, alleviates the burden on government finances.

Egypt has significantly cut subsidies on fuels as part of a deal with the International Monetary Fund (IMF) for a loan in exchange for reforms.

News of Egypt’s oil hedge comes days after reports emerged about the annual hedge of a large oil producer, Mexico, which undertakes every year the largest and most secretive hedge on Wall Street.

Unlike Egypt, however, Mexico hedges to protect itself against low oil prices—so it buys put options, which give it the right to sell oil at a predetermined price.

The Mexican oil hedge, or the Hacienda Hedge, is considered the biggest hedging bet on Wall Street as well as perhaps the most secretive. Such hedges minimize the losses in case oil prices crash. Earlier this year, it was the oil hedge that is thought to have saved Mexico’s economy from ruin. 

This year’s annual hedge made Mexico as much as US$2.5 billion, according to Bloomberg.

By Charles Kennedy for Oilprice.com

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  • Mamdouh Salameh on December 09 2020 said:
    This is an articulate and forward thinking by Egypt. This helps the government to offset the cost of fuel subsidies, alleviate the burden on government finances and reduce budget deficit.

    Even China has been buying extra volumes of crude oil taking advantage of low prices to fill its oil storage and add to its strategic oil reserves.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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