Siseko Njobeni
25 November 2008
Johannesburg — PETROCHEMICALS group Sasol last week said it had no intention of "closing off" the crude oil hedge on part of its synfuels production in the light of falling international crude oil prices.
By "closing off" the hedge, Sasol would realise a profit as the crude oil price has fallen below its hedge's "floor" of $90 a barrel. In August, Sasol entered into a hedge with a "cap" of $228 a barrel and a "floor" of $90.
The group has hedged 30%, or about 16,425-million barrels of its planned South African synfuels production in the 2009 financial year. Sasol embarked on the hedging strategy as a measure to protect the group against the adverse effects of short-term oil price volatility and rand-dollar exchange rate fluctuations.
The hedge protects Sasol against crude oil prices below $90 a barrel and the group will benefit from crude oil prices of up to $228 a barrel. On Friday afternoon, the spot price of Brent crude oil was more than $47 a barrel, way below its record level of more than $147 a barrel.
Sasol spokeswoman Jacqui O'Sullivan said the hedge was strategic and part of the company's risk management.
"Therefore we will not close off the hedge prematurely. The current hedge expires at the end of May (next year). We consider strategic oil price hedging annually," she said.
O'Sullivan said eight international banks active in the oil markets participated in the hedge. "The names are confidential," she said.
In terms of the hedge, Sasol would incur opportunity losses on the hedged portion of production should the crude oil price exceed $228 a barrel.
Sasol has entered into a similar crude oil hedge for 550000 barrels of oil from Sasol Petroleum International's west African output for a range between $90 and $240 a barrel.
In the past financial year, Sasol set the hedge of 30% of synfuels production at between $62,40 a barrel and $76,75. But a significant increase in crude oil prices in the 2008 financial year - the average price was $95,51 a barrel - saw Sasol incur a R2,3bn hedge loss for the year to June this year.
The chances of Sasol suffering a similar fate in this financial year look slim as the international oil price has been in free fall recently.
Economist Fanie Joubert of Efficient Group said the recent fall in crude oil prices could be attributed to uncertainty about global demand.
"There are worries about recession in major economies. Europe and Japan are in recession. There are fears that the US is on the brink of a recession. People therefore expect that global demand for oil will be down because of the downturn in major economies," Joubert said.
The recent strength in the dollar has also contributed to the low crude oil price, he said.
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