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BP Joins Shell In World’s Largest Oil Hedge

Mexico

BP has helped Mexico to carry out its annual oil hedge program in which the country spent the equivalent of $1.25 billion to lock in oil export prices for 2018, industry sources told Reuters on Tuesday, in what is a second oil supermajor after Shell helping Mexico in Wall Street’s biggest oil hedge.  

In September last year, Shell became the first oil major to venture into the territory of Wall Street’s biggest banks in helping Mexico make the world’s largest commodity hedge, four sources with knowledge of the issue told Bloomberg at the time.

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.

Mexico buys put options from investment banks in what is the biggest annual oil deal on Wall Street. Mexico typically hedges 200-300 million barrels of oil, and with the put options it has the right, but not the obligation, to sell oil at a previously set price and timing.  

The biggest Wall Street banks have dominated the oil hedge for years, but their role in helping Mexico lock in oil export prices has lessened, due to stricter rules for banks trading commodities.

In 2016, Mexico spent US$1 billion on buying put options to lock in an average export price of $38 per barrel of its crude basket for this year.

Related: Putin’s Masterstroke Of Energy Diplomacy

This year, Mexico is hedging for next year to lock in an average export price of $46 a barrel.

According to data by Mexico’s Finance Ministry quoted by Bloomberg, the country spent the equivalent of around $1.25 billion on the oil hedge program for 2018, which was 21 percent higher than the oil hedge in 2016 to lock in prices for 2017. Mexico’s spending on the world’s biggest oil hedge has been at around $1 billion over the past few years.

By Tsvetana Paraskova for Oilprice.com

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