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Iraq mulls for largest oil hedging deal

To lock in prices for future crude sales, Iraq is mulling an oil hedging program. The country is though at very early to stage to explore a hedge, as noted by Falah Al-Amri, the head of Iraq’s state oil-marketing company, known as SOMO.

He stated, "We will not rush. This is a long process." He also noted, "We must make sure we do not lose money. You know the Iraqi parliament, it would not accept that."
According to experts, if Iraq goes ahead with its plan, it would require to make contracts for price protection to about 400 million barrels a year of crude. This will be the large hedge than Mexico, which currently uses contracts to cover about 250 million barrels a year. Petroleos Mexicanos, the state-owned oil producer also known as Pemex, this year also hedged its output, an additional 100 million barrels.

Although oil hedging is common in the private sector, for example by U.S. shale producers to lock-in revenues and airlines to guarantee a maximum price for their jet-fuel, they are rare among oil-producing countries. Apart from this, only a few nations have publicly disclosed hedge programs. Ecuador and Ghana are in that list along with Mexico.
Oil-producing countries face a number of obstacles to hedge. Mexico has spent on average $1 billion a year buying options contracts that give it the right, but not the obligation, to sell at a predetermined price. The size of the transaction could roil the market, sending prices lower. Any losses could carry a heavy political price.

Oil traders and bankers who monitor the Mexican oil hedge have said in the past the program contributed to push oil prices lower at least in 2008 and 2014.
However, Al-Amri has not explained the type of hedge that would be adopted by Iraq. He just noted that Iraq is in a learning process.

He said, "We are sending people for training with international companies and they will learn about hedging and how we can do it. We will study and make a proposal to the government."
The hedging program would be a departure from usual business practices in the Middle East, where producers sell crude largely under long-term contracts with refiners. Iraq is already testing out new ways of selling oil, for example auctioning crude cargoes on the short-term market.
Al-Amri concluded that transformation of SOMO is unstoppable.
Updated 27 May 2017 | Soruce: Bloomberg | By S.Seal
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