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Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Mexico Spends Record $1.25 Billion On 2018 Oil Hedge

Mexico spent $1.25 billion on an oil hedge to lock in oil prices for 2018, according to new data released by the nation’s finance ministry.

On average, Mexico has spent $1 billion in previous years to maintain its oil hedge, which prevents the government from losing billions in oil revenues if barrel prices take a dive. After the past three years of crisis-level oil prices, the technique has inspired other countries, notably Iraq, to consider creating a substantial hedge of their own, which would dramatically affect budget writing on the national level.

The 2018 Mexican budget, published last month, assumes a $46 barrel – a level backed by the terms of next year’s hedge. The Hacienda Hedge, as it is formally known, is considered the biggest hedging bet on Wall Street as well as perhaps the most secretive. It has earned Mexico—and a few large investment banks—billions since it was first made in the 1990s.

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 $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 $6.4-billion windfall in 2015 after the price crash from mid-2014. For 2016, the hedge made Mexico $2.7 billion.

The hedge for 2018, Mexico’s Finance Minister said in September, would be moderately larger than the last one amid the liberalization of domestic gasoline prices. At the same time, Finance Minister Antonio Meade told Bloomberg, the cost of the hedge aiming to secure the export prices of Mexican crude would remain largely unchanged from the 2017 bet.

By Zainab Calcuttawala for Oilprice.com

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