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The Billion Dollar Bet On An Oil Price Crash

Mexico's oil hedgers, one of the world's most-active sovereign oil-trading desk, has spent nearly $1 billion on options contracts to protect the government's revenues from oil sales for 2020 against volatile price action.

The news is especially notable because, as we reported last month, Russia is considering oil prices could drop to as low as $25 in 2020. 

WTI prices remain in a 12-month bear market from last October's 76.90 high as oil products demand worldwide have dropped, as well as a synchronized global slowdown continues to gain momentum.

Mexico Oil Hedge

(Click to enlarge)

Sources told Reuters that Citigroup Inc, Goldman Sachs Group Inc, NP Paribas SA, and JPMorgan Chase & Co are among some of the top firms on Wall Street aiding Mexico in building out the hedging program for next year. 

Reuters noted, "It was not immediately clear what volumes Mexico had hedged or what price protection it had secured. One Wall Street source estimated that the program was nearly complete while another put it at about 75%."

Mexico Oil Hedge

(Click to enlarge)

Mexican Deputy Finance Minister Gabriel Yorio told the Congress of the Union on Tuesday that the hedging program would enable Mexico to sell oil around the $49 level for next year, allowing the government to create a 2020 budget. 

"This is a price at which we can control the risks of a fall in the oil price and, obviously, if the price is higher, we'll have higher income," he told Congress. "So, I believe we are covered against the downside risk."

Yorio faces a difficult challenge in getting the hedging program right. Tensions are soaring across the Strait of Hormuz, helping to stabilize oil at higher prices, but then there's the global slowdown that is also weighing on demand and depressing prices. 

The former finance ministry official Julio Ruiz told Reuters that "this year, I believe they'll do something similar to what we did back in 2017." 

And if that's the case, the 2017 strategy bought nearly $1.25 billion of put options to lock in export prices for the next year. 

Related: Iran’s Lifeline Against U.S. Sanctions

If geopolitical tensions continue to soar in the Middle East, then it's likely oil prices will remain elevated in 2020 -- likely to only expire Mexico's hedging program completely worthless. 

But if geopolitical tensions remain mute, and the synchronized global downturn continues to broaden, then the hedge would be rewarding. 

Why is Russia preparing for $25 oil prices in 2020? Is Mexico's latest hedge a sign that the net direction of the market for 2020 is down?

By Zerohedge.com

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