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Breaking News:

Oil Soars 5% As Bullish News Mounts

Mexico’s Budget Is Protected By Its Mega Oil Hedge

“Everything” in the Mexican budget that needs to be covered by oil revenues is covered, the country’s Finance Minister, Arturo Herrera, said as quoted by Reuters, in response to a local daily question about how safe the state oil company, Pemex, was.

There have been reports that credit rating agencies might downgrade Pemex’s rating because of its high debt levels and the current international oil price situation but, according to Herrera, the company’s credit rating will not place Mexico’s finances in danger.

Since the start of the year, Mexican crude has lost more than 56 percent of its value, according to Mexico News Daily, with a 31.6-percent plunge resulting from the start of the oil price war between Saudi Arabia and Russia. On March 18, the Pemex oil export basket closed trade at $14.54 a barrel, according to a Reuters report, down by more than 22 percent.

According to Herrera, however, there is no need to worry. Some 80 percent of budget needs have been covered by the notorious Mexican oil hedge and the rest is covered be unspecified reserves.

Earlier this month, Herrero, as cited by Reuters, said the hedge, at $1.4 billion, covered Mexico’s oil income completely.

“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,” Herrera said.

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 oil supermajors in a series of about 50 transactions. Mexico budgeted for oil at $49 a barrel this year and this was the price at which it hedged its exports.

By Irina Slav for Oilprice.com

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