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Mexico Pursues World’s Largest Sovereign Petroleum Hedge

Crude Oil

In what sources say could amount to the “world’s largest sovereign petroleum hedge,” Mexico has been buying oil contracts throughout this summer to lock in 2017 oil prices—seemingly on the down-low.

Oil futures for 2017 had been the highest in June, which is apparently when Mexico began its most recent hedging strategy. The contracts will allow the Latin American country to sell crude at a price determined in June or July. The window for oil hedging purchases by the Mexican government usually occurs in August or September.

Early June Brent prices stood at $53 a barrel, roughly $10 dollars higher than the current price.

Mexico’s Finance Ministry has so far declined to answer questions presented by The Yucatan Times.

The Mexican government has earned $3 billion from its oil hedging tactics during the first half of this year, according to previous estimates, and in 2015, it earned a total of $6.4 billion by employing the same strategy.

Mexico has been suffering from new austerity measures meant to relieve large budget deficits caused by the chronically low price of oil.

In April, the government announced $9.3 billion in spending cuts, with Finance Minister Luis Videgaray saying that hedging would continue into 2017.

New concerns in the global energy market have changed the way Mexico considers its financial future over the past couple of months.

Related: What Really Caused The Oil Price Rebound?

A further $1.6 billion in government spending will be cut in response to the impact of the Brexit, while domestic industrial production has also weakened.

State-run oil giant Pemex, which finances roughly 20 percent of the federal budget, reported record low production in July, in addition to a fifteenth consecutive quarterly loss. As a result, the government may be swayed away from hedging and towards a stronger budgetary restraint.

“The Mexican government has done a good job at buying these put options because they have helped to smooth the transition of public finances towards lower oil prices, but it’s just breathing room,” said Carlos Capistran, chief Mexico economist at Bank of America to Bloomberg. “This buys the government time to think about the best way to go about expenditure cuts.”

By Zainab Calcuttawala for Oilprice.com

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