A new mechanism to ensure the stability of Iraq's oil revenues
22/7/2018 12:00 am
Currently being researched between SOMO and TBI,
Baghdad / Farah Al-Khafaf
The Iraqi Trade Bank (TBI) and the National Oil Marketing Company (SOMO) are holding talks to adopt a new mechanism to protect Iraq's revenues from oil price fluctuations in the global market.
"The oil is a commodity and any commodity that is priced for sale is exposed to fluctuations in prices in the global market, as it depends on the supply and demand of producers and buyers," Faisal Al-Hims, general manager of the bank, told Al-Sabah.
"In the case of many supplies, prices are low, and on the basis of which the approved countries will be affected by their budgets on the revenues derived from this commodity, therefore affected development rates and projects and the needs of those countries, but if the supply is reduced, it increases prices."
And to create a balance and not to affect the oil producing countries, especially Iraq, based on oil revenues to support its annual budget and to ensure that these countries are not affected by fluctuations in prices, the Director General noted that resort to a mechanism called Hedging, Concluded between the producer and the buyer, through a bank or financial institution licensed, taking into account the risk of price fluctuations and reflect them at a fair price between the parties (producer and buyer).
Iraq will work on this mechanism for the first time in cooperation between the National Oil Marketing Company (SOMO) and the Iraqi Bank for Trade (TBI) under the supervision of the Ministry of Oil, to follow the mechanism of hedging for oil, according to Hymes, stressing that it is useful to provide the amounts and revenues that support the annual budget of the country away from fluctuations Oil prices in the global market.
For his part, the head of trading in TBI Zaid Farouk said in a statement to "morning" that "the main idea of this mechanism is to protect Iraq's revenues from fluctuations in oil prices in the global market and ensure a steady income."
Farouk pointed out that "this process is done through contracts concluded between Iraq as a producer and buyers from countries of the world, determine the price of a barrel of oil, and be contracts either monthly or annual may be up to two years, and there is a desire by buyers, especially that Iraqi oil is required in the market Global as the buyer wishes to have a stable commodity."
"The price within the contracts is based on market data. The Bank is working on pricing after the adoption of oil price studies in the global market over the past years, as well as future forecasts for product protection against risks, by a team of local expertise in cooperation with foreign expertise "He said.
Farouk pointed out that "the hedging mechanism will contribute to not be a fiscal deficit in the budgets of Iraq next, as it supports the stability of income, and helps Iraq to meet its financial obligations locally and internationally, according to several tools included in the contracts between the parties."
The Director General of the bank said that "the Ministry of Oil welcomed this proposal and encouraged to follow this mechanism, especially that Iraq has an oil marketing company, so it is necessary to manage the hedging activity that protects its revenues from oil through the establishment of trading rooms within the company, In this area to manage the hedging process, explaining that his bank has employed local and foreign expertise to manage this process in cooperation with the oil marketing company (Sumo).
"The adoption of this mechanism in Iraq is a sovereign decision, based on the desire of the Government of the Ministry of Oil in this area, to protect the country's financial revenues, as any bank can be a trading oil company to manage the hedge."
He also noted that "the subject is still under discussion and studies between the company Sumo and the Iraqi Bank of Commerce to reach a formula that benefits the country as an oil product, which was considered an initiative by the Iraqi Trade Bank to ensure stability and balance of income of the country.