Mexico Overhauls Its Huge Oil Hedge

Mexico's billion-dollar oil hedge to protect next year's revenues against oil price volatility is getting an upgrade-and the new Hacienda Hedge 2.0 is getting more than just a facelift.

Instead of buying put options all at once, which gives Mexico the option to sell its oil at a specific locked-in price (but not the obligation to), Mexico may purchase put options in smaller batches throughout the year.

It is a strategy that airlines already use, according to Bloomberg, and it is a big shift in strategy. 

This trickle-in strategy will prevent oil market swings and speculation from others in the market that may attempt to trade ahead of Mexico.

Mexico spent $1.23 billion to protect its 2019 crude oil revenues, locking in a fixed price of $55 per barrel. In April last year, Mexico's President Manuel Lopez Obrador said that Mexico was prepared to reap $6.2 billion from the hedge, which was at $49 per barrel at a time when the Mexican basket price was a bit more than just $7 per barrel.

While Mexico hasn't been transparent about its secret dealings for the massive hedges, it's generally thought that Mexico's oil hedge-the largest such deal on Wall Street, does pretty well.

Bloomberg estimates based on government data show that Mexico has spent $15.1 billion in fees buying put options over the last two decades, but has earned $16.5 billion over the course of those twenty years-with the biggest profits mostly in 2015 and 2016 when oil prices tanked.

Banks and oil traders on the other side of the hedge have in the past included Citi, Goldman Sachs, BP, JPMorgan, and Shell.

The average cost of Mexico's annual hedge is $1.2 billion per year, Deputy Finance Minister Gabriel Yorio said last year, and encompasses between 200 million and 300 million barrels.

By Julianne Geiger for Oilprice.com

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