Fuel traders have expressed mixed views on the government’s decision to insist on fuel hedging at a time when international market prices are in decline.
While there was unanimous agreement that hedging offered more stability in prices, recent experience showed that such deals could also backfire. Last May, the government announced a 2c reduction in fuel prices guaranteed till the end of the year. Unfortunately for consumers, the good news did not last long because, a few months down the line, they could not benefit from the sharp drop in the international oil markets because prices were locked.
In his Budget speech Finance Minister Edward Scicluna announced cheaper fuel prices from January 1 until the end of March. The government opted for a shorter three-month hedging agreement rather than six, possibly to minimise risks in case international prices kept falling.
However, a significant chunk of the reduction in price goes back into the government’s coffers due to an increase in excise duty – 2c on diesel and 1c on unleaded petrol. As a result, rather than a 3c drop in prices, consumers were left with a 1c reduction per litre on diesel and a 2c cut per litre on petrol.
Most probably, we will have to pay a hefty price for the recent drop in prices
An experienced fuel trader who preferred to remain anonymous told Times of Malta that, in spite of the recent decline in fuel prices, hedging was always the best option given the market’s high volatility.
“An analysis over a five-year period shows that, in spite of the occasional drops, fuel prices tend to go back up and exceed previous levels. As a result, the overall trend would be an upward movement in prices,” the trader argued.
“Most probably, we will have to pay a hefty price for the recent drop in prices,” he added.
He said he would even consider long-term hedges of up to 18 months. In Enemalta’s case, there was even less room for manoeuvrability because, unlike other energy companies, it could not get a lucrative deal by offering to pay in advance due to its ailing finances, the trader noted.
Acknowledging that hedging was a form of gambling, he said it was less risky than relying exclusively on spot prices.
Another fuel trader preferred to be much more cautious.
“If I were in Enemalta’s position, at this moment in time I would not have hedged or done so for short periods,” he said.
He said hedging was mostly effective when prices were on the rise. “Though it brings stability, it does not necessarily imply lower prices at the pumps,” he added.
“Unfortunately, last year, Malta locked in at a high price and the only way out was to sell its hedge to minimise losses,” the trader said.
In a fully liberalised market, a fuel company would certainly have taken this route to remain competitive but the local scenario was different, he continued.
“Unfortunately, after 10 years of EU membership, the fuel sector in Malta is worse than it was 50 years ago when there were three suppliers,” he remarked. As a result, consumers could not mitigate the increase of fuel prices by switching brands.
As for the fluctuation in prices that used to be criticised by the Labour Party, he remarked that, in most of Europe, variations occurred on a monthly or even weekly basis.