Mexico has locked in an average export price of US$46 per barrel of crude oil for 2018 in its annual oil hedge, which is closely watched as the biggest in the world. In an interview with Bloomberg, Mexico’s Deputy Finance Minister Vanessa Rubio said that the hedge will be supported by a specially set up Oil Revenue Stabilization Fund, which, along with the central bank’s exchange-rate surplus, will serve to guarantee the price.
The Mexican oil hedge, or the Hacienda Hedge, is considered the biggest hedging bet on Wall Street as well as perhaps the most secretive. It has also earned Mexico—and a few large investment banks—billions since it was first made in the 1990s.
The story began when Iraq’s invasion of Kuwait took one-tenth of the global oil supply off the market, raising prices. The government then accurately predicted that the high prices wouldn’t last, betting on a decline. This accuracy has been remarkably consistent through the years, with Mexico making money most of the time when it has placed the bet.
The hedge consists in the Mexican government buying large amounts of put options from a selection of investment banks. The average that the government has spent on these put options in the last few years has been US$1 billion, Bloomberg’s Nacha Cattan writes. In 2000, Mexico began locking in prices annually and has since made a profit three times, including a US$6.4-billion windfall in 2015 after the price crash from mid-2014. For 2016, the hedge made Mexico US$2.7 billion.
The hedge for 2018, Mexico’s Finance Minister said in September, could be moderately larger than the last one amid the liberalization of domestic gasoline prices. At the same time, Finance Minister Antonio Meade told Bloomberg, the cost of the hedge aiming to secure the export prices of Mexican crude would remain largely unchanged from the 2017 bet.
By Irina Slav for Oilprice.com
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