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Mexico Leaves OPEC Behind, Pockets Billions From Oil Hedge

Mexico has made $2.5 billion from its 2020 oil hedge—the biggest hedge in the oil world.

Bloomberg reported the news citing unnamed sources familiar with the hedge, noting the hedge runs from December 1 of one year until November 30 the next year.

Bloomberg estimated that based on the total size of the payout, the price was probably between $45 to $47 per barrel, assuming the government bought the same amount of options it has bought in previous years. The average price of the Mexican oil basket in the period December 1, 2019, to November 30, 2020, was $36.40 per barrel.

In January 2020, however, Reuters reported Mexico’s finance ministry had said the hedge was conducted at $49 per barrel of oil. For 2019, the hedge priced in at $55 per barrel of oil.

Mexico is profiting from its hedge for the fourth time in two decades, at a time when OPEC+ is quarreling over production cuts that Mexico earlier this year refused to take part in, with the oil hedge likely a factor for that decision. Indeed, in March this year, Mexico’s finance minister said 80 percent of the 2020 budget of the country was covered by the oil hedge.

“The hedge is usually not cheap, it is expensive, but it is for occasions just like this. The income part is covered, we will not have a direct impact on the budget,” Arturo Herrera said in March.

The Mexico oil hedge is the most secretive hedging transaction in the oil world and is followed closely by banks as a sort of weathervane for oil prices. A handful of these are directly involved in the hedge: Mexico buys put options on oil from them and from several oil supermajors in a series of about 50 transactions. Mexico budgeted for oil at $49 a barrel this year.

By Irina Slav for Oilprice.com

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