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Mexico’s 2018 Oil Hedge Edges Higher

Mexico’s oil hedge program for next year will be marginally higher than this year’s hedge, partially due to the liberalization of the gasoline prices, Mexican Finance Minister Jose Antonio Meade told Bloomberg in an interview aired on Tuesday.

The cost for the 2018 oil hedge for the government would be roughly the same as this year, the minister noted.

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

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

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 and with the put options it has the right, but not the obligation, to sell oil at a previously set price and timing.  

In early June, Mexico started sounding the Wall Street banks for rates for the 2018 oil hedge program.

Mexico’s budget draft for 2018 proposes an export price of US$46 per barrel, Meade said. The government is establishing a stabilization fund within the budget that allows it to have resources in case of a drop in budgetary income, be it because of taxes or oil prices, the minister added.

The combination of the oil hedge and the stabilization fund actually provides support to the price Mexico has set in the budget, Meade noted.

Related: The Next Step In Mexico’s Oil & Gas Privatization Push

“We’re far enough advanced so that we’re confident in saying that the $46 coverage and stabilization fund have good support,” Meade told Bloomberg.

“We are in the process of finishing the coverage program,” he said.  

The difference in the 2018 oil hedge program compared to previous years is that Mexico started liberalizing gasoline prices and this “played a role in looking at how much we would cover”, the minister noted.

By Tsvetana Paraskova for Oilprice.com

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