Amid a fuel crisis that is spiraling out of control, the notorious Mexico oil hedge this year is worth US$1.23 billion with the average export price of Mexican crude seen at US$55 a barrel, Reuters reports, citing the country’s Finance Ministry. The ministry did not specify exactly how many barrels the hedge covered.
Last year, Mexico locked in an average export price of US$46 per barrel of crude oil in its annual oil hedge, which is closely watched as the biggest in the world. During the year, the Mexican basket of crude grades hit a high of US$77 a barrel and a low of US$45.18 per barrel, but for most of the year stayed firmly above US$50 a barrel.
The 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.
“With these actions we protect that budget ... against drops in prices of oil below this level,” the Finance Ministry said in a statement. “As a result of these complementary strategies, a price of $55 per barrel was assured for the Mexican export blend in 2019.” Related: Oil Enters Bull Market As Shorts Are Wiped Out
The hedge consists of 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.
Mexico’s new government is eager to increase local oil production, which has been steadily declining for more than a decade, but it also wants to export less of it and refine more at home to reduce Mexico’s dependence on imported refined products.
By Irina Slav for Oilprice.com
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