Government Goes For Hedging

Government is exploring the possibility of hedging crude oil, as part of measures to minimize the impact of soaring world crude oil prices on the economy.

With the spate of rising international crude oil prices amidst speculations that the price would cross the all-time $200 per barrel mark, government thinks it is time to explore the grey area which is extensively harnessed by countries in Europe, Asia and the U.S.
Consequently, government is currently holding talks with Standard Chartered Plc to enter into an oil hedging contract to help protect the economy against the soaring prices.

Finance and Economic Planning Minister, Kwadwo Baah-Wiredu said in Maputo, Mozambique where he is attending the annual meeting of the African Development Bank that under the accord, Ghana would be insured if oil prices rise above $130 a barrel or below $100.

Hedging is the process by which when there is an anticipation of a rise in the price of a commodity in future, the buyer places a contract to buy the commodity at a fixed price from the seller.

The situation seems to help curtail shocks that the rising oil comes along with.

Ghana, the world's second-biggest cocoa producer, imports about 60,000 barrels of oil a day. Crude oil has surged 33 percent in New York in the past six months, reaching a record $124.74 a barrel yesterday.

With the price of crude oil continuing its rise on the world market, calls have been made by a former Deputy Minister of Finance, Moses Asaga and other petroleum experts for the nation to go into hedging oil.

But the Finance Minister said earlier that hedging is risky for the economy since the oil market is volatile, stressing that the nation will find ways of developing other alternative strategies in order to cushion the economy against the oil shocks.

In 1998, AngloGold Ashanti hedged 600 ounces of its 1.5 million annual productions for 20 years, betting that the price of gold will continue to fall over this period. It turned sour as gold prices rather picked up.

Amit Juneja, Senior Manager on the Commodity Marketing Desk of Stanchart, Singapore explained that hedging is risky but depending on the way it is managed, it can be very useful against volatility.

He cited the case of Sri Lanka, in June last year when the government initially resisted but upon understanding of the market operations through competent advice, decided to hedge gas oil prices through its National Oil Company, when it was by then quoted at $60 per barrel.

For him, the Ashanti Gold instrument was not managed well enough.

Mr Baah-Wiredu also announced that the government has cut its economic growth target for this year to 6.8 percent as oil trades at more than $100 a barrel.

The government had expected the economy to expand at seven percent this year based on an oil price of $85 a barrel, Baah-Wiredu added.

The economy expanded about 6.3 percent last year.

“The oil impact is massive. We had to revise that growth forecast. We need to get more foreign exchange to meet those bills. The current account is under strain.”

Rising oil and food prices pushed inflation up. The central bank raised its benchmark interest rate by 75 basis points to 14.25 percent in March, the second increase in four months.

“There is nobody in Ghana that wants to see galloping inflation. It s not good for us, it s not good for any economy.”

The Finance Minister predicted that inflation will probably slow to about 13 percent by the end of the year.