OPEC | OPEC Sec-Gen breaks taboo over hedging activity by members

OPEC Sec-Gen breaks taboo over hedging activity by members

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WASHINGTON DC (CI MENA) — The Organization of the Petroleum Exporting  Countries (OPEC) seems to have broken a decades-old taboo of OPEC member states hedging their oil production during a visit by OPEC Secretary-General HE Mohammad Sanusi Barkindo to Washington, DC.

[Organization of the Petroleum Exporting Countries (OPEC) His Excellency Mohammad Sanusi Barkindo speaks to Capitol Intelligence/CI MENA using CI Glass with Hess Corporation CEO John Hess at CSIS in Washington, DC. December 13, 2016]

Secretary-General Barkindo said it remains the “sovereign” decision of each individual member to hedge their oil production but he is open to working with hedge funds, producers, the International Monetary Fund and customers to avoid massive volatility in oil prices in the future.

Barkindo’s statement that is up to the individual nation state to decide whether to hedge their output marks a radical departure from OPEC’s policy of basically prohibiting OPEC member states from using derivative markets to hedge oil prices. Mexico, a non-OPEC member, allows its state oil group Pemex to hedge the country’s annual oil output.

During a panel at the Center for Strategic and International Studies (CSIS) with Hess Corporation CEO John Hess, Barkindo told the audience that he will meet with New York City hedge funds to discuss OPEC’s policies and background on the historic decision by OPEC and non-OPEC countries to reduce oil output by around 600,000 barrels per day following OPEC’s November’s agreement to cut production by 1.2m barrels per day.

Barkindo said he is astonished by the sheer volume of the financial oil market, noting that in the month of November alone traders in London and New York traded 48 million contracts for a total of 48 billion paper barrels.

The giant oil market turbulence that led to a fall from US$115 per barrel in June 2014 to US 30 per barrel before jumping up to current prices of US$45-50 per barrel has wreaked havoc on short to medium-term government budgeting by oil producing countries like Saudi Arabia, Algeria and Nigeria.

An IMF source said the Emirate of Qatar looked at hedging their oil output but dropped plans due to OPEC’s opposition and the lack of economic viability because of the country’s relatively modest annual oil production.

In 2012, the Central Bank of Libya and its sovereign wealth fund, Libya Investment Authority (LIA), began studying whether to hedge the country’s much more important oil output on the Chicago Mercantile Exchange but talks failed to progress as Libya fell into spiral of increasing anarchy.

[Libyan Investment Authority (LIA) Chairman Fawzi Farkash speaks to Capitol Intelligence/CI MENA using CI Glass at Tunisia 2020 Investment Summit in Tunis. November 30, 2016]

Secretary-General Barkindo said he would be open with working with main derivative exchanges such as the CME Group owned NYMEX to promote on-exchange trading rather than the costlier and less transparent practice of over-the-counter trades through individual banks.

For more information please call +1-202-549-3399 or email pks@capitolintelgroup.com. Copyright of Capitol Intelligence Group – Turning Swords into Equity ®.

PK Semler
Peter K. Semler is the Chief Executive Editor and founder of Capitol Intelligence. Prior, Peter was the Washington, DC Bureau Chief for Mergermarket (Dealreporter/Debtwire) of the Financial Times and personally headed political/economic coverage of the US House of Representatives and Senate.
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