CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014 PAGE 1

CARIBBEAN Petroleum UpdateA Publication of the Caribbean Energy Information System (CEIS)

APRIL 2014 ISSUE

To access CEIS website

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Large fuel consuming companies such as utility companies and airlines use large volumes of fuel to carry out their daily operations. In order to minimize their exposure to volatile and rising fuel costs they utilize what is known as fuel hedging. In this issue of the Petroleum Update, we seek to explore the funda-mentals of fuel hedging and to gain an understanding of futures contract.

Fuel hedging is a contractual tool which allows companies that consume large volumes of fuel to establish a fixed cost when purchasing a commodity. Compa-nies enter into hedging contracts for two main reasons, to reduce their exposure to future rise in fuel prices and to have a fuel cost established for budgeting purposes. The primary idea behind a hedge is that a portion of the commod-ity is purchased at a set price to be paid sometime in the future. If the price of the commodity rises, that pays off for the company, however if the prices falls below the contracted level, it could be a money losing proposition. Most times fuel consuming companies can project what the price of fuel will be in the future and so will hedge based on their projec-tions.

The predicted future price of fuel will determine the cost of fuel hedging. For example, an airline can place hedges either based on future prices of jet fuel or crude oil. Normally though, the price of jet fuel and crude oil are correlated as

crude oil is the primary source of jet fuel. A company that does not hedge its fuel costs generally believes that they have the ability to pass on any increases in fuel prices to their customers, without a negative impact on their profit margins. Also, the company is confident that fuel prices are going to decrease in the future.

With regards to a futures contract, this is simply a contract between two par-ties to purchase pre-determined quanti-ties of a commodity for an agreed price with delivery and payment occurring at a future date. Both buyer and seller are obligated to buy and sell the specified quantity at which the futures contract was sold. However, future contracts rarely result in delivery as the contracts are used for hedging before expiration.

Therefore, how can futures contract be used to guard against rising fuel prices?

Take for example a delivery company that uses fuel for its fleet of delivery trucks. As a strategy to ensure that their fuel costs do not exceed their budgeted fuel price, they “lock in” a price for their anticipated fuel consumption. Say for example the company anticipated fuel consumption is 32,000 gallons of gasoline in April 2015, to hedge against the price of gasoline; you purchase a futures contract for 32,000 gallons based at the closing price as at April 2014 of US$2.90/gallon. However prior to deliv-ery date the company decides to sell back their futures contract, how then would

F u e l H e d g i n g : U s i n g F u t u r e s C o n t r a c t t o H e d g e a g a i n s t v o l a t i l e f u e l p r i c e s

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this benefit the company? Assuming that the prevailing market price at which the futures is sold back is US$3.50/gallon. In this case the company would have gained on the futures contract a profit of US$0.60/gallon (US$3.50-US$2.90/gallon). However, since the company decided that they are not taking delivery of the futures contract, the price at the pumps will be US$3.50/gallon although the net cost will be US$2.90/gallon as a consequence of the profit gained on the contract. For the ease of simplicity the net cost would have excluded transporta-tion, distribution fees, taxes, et cetera.

On the other hand, assuming that the futures contract was sold back at US$2.00/gallon (March 2015 price), the company would have incurred a loss of US$0.90/gallon on their futures contract (US$2.00-US$2.90/gallon). This is due

to the fact that the company did not accept delivery of the futures contract while the pump price would have been e US$2.00/gallon and the net cost will be US$ 2.90/gallon as a result of the loss on the futures contract.

Therefore, purchasing gasoline futures contract provided the company to hedge (fix) anticipated gasoline costs for a spe-cific time period regardless of whether the futures price fluctuates between the time of purchase and the date of expira-tion. This strategy can also be applied to hedging with crude oil futures and even heating oil futures.

In the Caribbean, for example, Trinidad and Tobago owned Caribbean Airlines utilized fuel hedging strategies because as oil prices increases the aviation indus-try is one of the first industries that it impacts. Therefore, the airline uses fuel hedging to ensure that the increased cost in fuel prices is not directly transferred to

the consumers either through the cost of tickets or otherwise. Also, St.Lucia Elec-tricity Services Limited (LUCELEC) utilizes a fuel price hedging programme that is designed to reduce large fluctua-tions in the fuel surcharge. As a result of this programme consumers saw a reduc-tion in their electricity bills in 2013. Deciding on timing and what future costs to lock in is no easy task, hedging requires methodical market projections. Hedging can be used as an energy-man-agement strategy. While there are many details that need to be considered before buying or selling a futures contract, the basic strategy is this; if a company is seeking to hedge against potentially rising fuel prices they would purchase futures contract on the specific fuel. Similarly, one has to sell futures contract in order to hedge exposure to declining fuel prices.

F u e l H e d g i n g : U s i n g F u t u r e s C o n t r a c t t o H e d g e a g a i n s t v o l a t i l e f u e l p r i c e s

Sometimes fuel hedging doesn’t completely insulate airlines from price spikes. Image source: http://edition.cnn.com/2011/TRAVEL/03/21/airlines.fuel.hedging/

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CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014 PAGE 3

Trinidad & Tobago ministers meet Japanese banker to discuss plant financing [...]...Read more

Jamaica’s Petrojam tenders to buy 50,000 bbl ULSD cargo for May [...]...Read more

Conejo village Alcalde removed for supporting US Capital [...]...Read more

Cuba Moves Ahead With $2.7 Billion LNG, Ammonia Projects [...]...Read more

PDVSA to use St Eustatius to load VLCCs [...]... Read more

JPS chief to speak at EHF wellness awards dinner [...]...Read more

T&T seeks consultant to draft Natural Gas Master Plan [...]...Read more

Hard-selling change inside T&T energy belt [...]...Read more

RUBiS displaying its true colours [...]...Read more

Trinidad’s Energy Costs Reduce Data Center Expense and Bring Enterprise IT Value [...]...Read more

GOB Waives Expiration On US Capital Exploration License [...]...Read more

PETROLEUM NEWS & HAPPENINGS

Caribbean EnergyIMF says Haiti’s economic growth could be affected by events in Venezuela [...]...Read more

New Petrocaribe office opens [...]...Read more

31-53 new wells to be drilled [...]...Read more

LNG production inches up [...]...Read more

Trinidad & Tobago’s energy sector to show robust growth in 2014: Howai [...]....Read more

Harmful Effects of Ethanol in Fuel [...]...Read more

Paulwell wants debate on coal energy; JLP’s position still fuzzy [...]...Read more

Customs about-face could make Bahamas key source for U.S. gasoline [...]...Read more

PDVSA renting the tanks in the Caribbean to blend crudes and handle trading [...]...Read more

Exclusive – Venezuela PDVSA expands Caribbean storage, rents NuStar tanks [...]...Read more

Mystery surrounds Energy World Corporation coup in Jamaica [...]...Read more

T&T’s LNG business will not be wiped out by American LNG [...]...Read more

IDB approves $20 million loan to Panama for rural electrification program [...]...Read more

Customers upset at JPS proposed request for rate hike ‘Unacceptable!’ [...]...Read more

Jamaica gives green light to 381 MW power deal [...]...Read more

YEA say no to JPS hike [...]...Read more

Petrotrin to invest $11.3 billion [...]...Read more

Repsol drills dry hole offshore Trinidad and Tobago [...]...Read more

Residential Energy Storage Comes to Jamaica [...]...Read more

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PAGE 4 CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014

BP farms out deepwater blocks offshore Trinidad and Tobago [...]...Read more

Jamaica grants OK for natural gas power plant [...]...Read more

Mayan Communities Back To Court Against US Capital [...]...Read more

Energy World International Granted Licence for 381MW Project [...]...Read more

Oil prices steady as Libya woes ease [...]...Read more

Energy World Gets Down To Business [...]... Read more

Oil spill report due month end [...]...Read more

Canadian Corporation Plans Tar Sands Strip Mining in Trinidad and Tobagol [...]...Read more

SATIIM says it will do what it takes to block the oil company [...]...Read more

Energy Minister Surprised By UC Rusal’s Overseas Expansion [...]...Read more

The Belize Natural Energy and Government of Belize Charitable Trust Launch Empowerment Fund [...]...Read more

Multiple bombings paralyze Colombian pipelin [...]...Read more

Brazil’s energy giant Petrobras is mired in controversy [...]...Read more

Govt allocates J$7.4m to support Latin America energy organization office in Jamaica [...]...Read more

Continued subsidy for Linden electricity is due to non-fulfillment of 2012 deal – chairman says [...]... Read more

Puerto Rico Agreement for Floating Storage and Regasification Unit Signed [...]...Read more

$156.3 Million for Rural Electrification Programme [...]..Read more

Jamaica seeks to further advance Energy Services Company Industry [...]...Read more

Smart Meters to be installed in St. Kitts homes by 2017 [...]...Read more

Libyan rebels agree to reopen two oil terminals after deal [...]...Read more

St. Kitts Adopting Smart Meter [...]...Read more

Petrotrin ‘committed to transparency in handling oil spills’ [...]...Read more

Trinidad and Tobago’s deepwater bid round draws lackluster response [...]...Read more

MENA Hydrocarbons Announces Sale of Non-Core Assets and Changes in Board of Directors and Executive Officers [...]...Read more

Hotline for disconnected Grand Bahama Power Customers Established [...]...Read more

Politicians squabble over energy prices [...]... Read more

Tobago, Major Energy Player? [...]...Read more

Tobago forecast to be major energy player [...]... Read more

Puerto Rico aims to cut energy production costs [...]...Read more

Takeover Safeguard Built Into EWI Deal [...]... Read more

Get On With LNG Energy Project! [...]...Read more

Maranco Energy Belize Limited confirms possible reserve of fifty million barrels of oil in South Canal Bank [...]...Read more

Sol To Retain Esso Brand [...]...Read more

PETROLEUM NEWS & HAPPENINGS................................cont’d from page 3/

CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014 PAGE 5

Prices at the Pump

See prices for all products at www.cippet.org

Retail pump prices for Regular Unleaded Gasoline in the thirteen (13) Caribbean countries reviewed at the end of April 2014 showed increases in prices for five countries namely; Barbados, Dominica, Grenada, Jamaica and Suriname. Price increases ranged between 1.3% and 4.4%, with Barbados experiencing the highest increase of 4.4%. Prices in the remaining eight countries were stable when compared to the previous month. The average retail price at the end of April 2014 saw a marginal increase with the average price in the region reflecting a US$0.01 per litre increase when compared to the previous month.

APRIL 2014

NOTE: *US Gallon = 3.785 L *Imperial Gallon = 4.546 L *As at November 1, 2009 MTBE was phased out from all gasoline blends in Jamaica and replaced with 10% Ethanol.

Regular Unleaded Gasoline: Average Retail Price (US$/Litre) 2014COUNTRIES JAN FEB MAR APR AVGANTIGUA/ BARBUDA 1.23 1.23 1.23 1.23 1.23BAHAMAS [91 OCT] 1.36 1.36 1.38 1.38 1.37BARBADOS 1.54 1.57 1.59 1.66 1.59B.V.I [87 OCT] 1.21 1.21 1.21 1.21 1.21DOMINICA 1.15 1.16 1.18 1.19 1.17GRENADA (95 OCT) 1.26 1.26 1.28 1.31 1.28GUYANA 1.09 1.10 1.12 1.12 1.11JAMAICA 87 Octane[E10] 1.23 1.24 1.26 1.28 1.25ST. LUCIA 1.32 1.31 1.31 1.31 1.31ST. VINCENT/ GRENADINES 1.08 1.07 1.09 1.09 1.08SURINAME [95 OCT] 1.39 1.37 1.37 1.41 1.38TRINIDAD/ TOBAGO [92 OCT] 0.42 0.42 0.42 0.42 0.42TURKS/ CAICOS 1.52 1.52 1.52 1.52 1.52

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

US$/

Litre

13 Caribbean Countries

Comparative Retail Pump PricesRegular Unleaded Gasoline

APRIL Avg vs4 Mths Avg (Jan - April 2014)

PAGE 6 CALL: 1-876-927-1779 | CARIBBEAN PETROLEUM UPDATE : APRIL 2014

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InternationalOIL PRICES

FEATURED OFFERS:Caribbean Energy Information System (CEIS) primary report of historical annual petroleum energy statistics provided for 18 Caribbean Countries. Included are data on total energy production, consumption, and trade; overviews of petroleum, natural gas, electricity, as well as financial and environmental indicators for over twenty years.

102.93

103.07 103.90

94.0095.0096.0097.0098.0099.00

100.00101.00102.00103.00104.00105.00

WK1 WK2 WK3 WK4 MTH AVG

US$/

BBL

Period

Average Weekly & MonthlyCrude Oil Prices

(Feb April 2014)

Feb-14 Mar-14 Apr-14

International Crude Oil Prices ended the three month period February to April 2014 with an average price per barrel of US$102.30. The highest weekly price seen in April for the commodity was US$103.90/bbl-reflected in week three while the lowest price for the three month period was in February of US$97.79/bbl. Average Prices in February and March 2014 respectively were 1.4% and 1.5% lower than the average price seen in April 2014.

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