Citi provides risk management solution for CPC
Citi Sri Lanka successfully structured fuel-hedging solutions for the
Ceylon Petroleum Corporation (CPC) in February this year. The CPC has
made hedging gains of USD 5.4 million from these transactions for the
month of March and these gains have contributed to their efforts in
maintaining local price stability.
These structures helped the CPC to manage its price volatility and
provide relief from the prevailing high oil price environment, for a
part of its oil imports.
Minister of Pertolium Resources, A.H.M. Fowzie said that the CPC has
earned USD 10 million through hedging and this has helped the CPC to
cover some of its losses.
“We had our last price increase in January and till April the CPC did
not go for any price increase even though the oil prices increased by
USD 20. The CPC is making Rs 31 loss from every diesel litre and Rs 40
loss from every kerosene oil litre.
The CPC is making Rs 5 profit through every petrol litre but it is
not sufficient to cover our losses”, he said.
The minister also said that he is expecting to propose the
Organisation of Petroleum Exporting Countries (OPEC) to setting up a
fund to supplement the oil-importing bill of third world countries.
“The increase of oil prices badly impact the developing economies of
countries such as Sri Lanka. OPEC should focus on subsidising these
economies on oil imports to mitigate the impact,” he said.
Driven by increased demand, refinery capacity shortages and
speculative interest, global oil prices reached unprecedented levels in
early parts of this year with crude oil reaching highs of US $ 115 per
barrel. CPC Chairman Ashantha De Mel said, “We are hedging 30 per cent
to 40 per cent of our requirement.
There are many hedging structures available in the market but the CPC
needs to be careful when selecting a correct hedging solution for the
At the request of the CPC, Citi closely examined the company’s
requirements and specific market views, and using its global expertise,
worked with the CPC to structure a number of solutions that utilised the
CPC’s view on oil prices.
Under these solutions the CPC is able to buy oil at lower prices that
the prevailing global prices while assuming certain risks to an extent
if prices should fall below certain levels.