In a world that has traded like a rollercoaster, in the past couple of months, companies that are exposed to the fuel price will have kept an eye on the Oil Price in the hope that it weakens leading to lower prices at petrol pumps. One way of mitigating this risk is to hedge Diesel and to gain some price certainty.
The way to hedge South African Diesel price exposure is by using a proxy Gasoil which is almost perfectly correlated to the Diesel price. A proxy is used in instances where no financial instruments are available to hedge risk directly as with the South African Diesel price. It should be noted that only the variable component of the South African Diesel Price (BFP) can be hedged. Taxes and levies are constant and cannot be hedged.
In the graph below the forward price of Gasoil (R/L) is shown on x May & y June 2020. The increase in Gasoil price from x May to y June can be seen across the forward curve. The increase has been more pronounced at the front-end of the curve (up to Oct 2020), resulting in a “flattening” of the curve. A direct result of this “flattening” is that average possible hedge price further out on the curve (Dec 2020 onward) do not differ dramatically from May 2020 to June 2020. The “flattening” of the curve has also coincided with reduce volatility as markets stabilise.
We have seen the Oil price climb back up to around the $40 per barrel, as economies are opening up, and we believe that Oil prices will continue to rally and we could see an increase in the South African Diesel price.
With rising oil prices we will advise Forward contracts as the best strategy at the moment as this will lock in the price, and with the curve being rather flat, it will mitigate any volatility that could happen in the future.
Below are indicative prices of Gas/Oil per litre of the basic fuel price.