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Mexico’s decision to halve oil exports this year and suspend them all together in 2023 will affect its oil hedge—the biggest in the world—substantially, pushing oil prices higher.
Bloomberg reports that thanks to its hedge, Mexico is one of the biggest sellers of oil contracts for any given year ahead. However, the hedge is based on its oil exports, and when, or if, these stop, the hedge will shrink, adding volatility and upside potential to longer-dated oil contracts.
The report quotes analysts and traders who explain that Mexico’s exit as a major oil option seller would mean the removal of “a natural cap” for prices: because the country locks in future exports, it effectively guarantees these exports would be available. Without the hedge, this certainty is gone along with the millions of barrels of Mexican oil that would have otherwise been sold abroad.
The chief executive of Mexico’s state-owned oil major Pemex, Octavio Romero, announced the decision to end exports late last year, saying that in 2022 exports would be slashed by 50 percent to 435,000 bpd.
Currently, Mexico is the third-largest oil exporter in the Americas, after the United States and Canada, according to data from the U.S. Energy Information Administration.
The main destinations for its crude are its northern neighbors in North America and China, India, and South Korea, as well as European countries. A cut in exports could make some of these importers look for alternative suppliers.
Meanwhile, the oil hedge is a major contributor to government revenues. It is also a potential safeguard against price drops and in 2020 saved Mexico’s coffers when international oil prices tanked amid the first wave of Covid-19. Last year, the country made $3.5 billion from the oil hedge.
For this year, according to reports, Mexico is hedging its oil output at a price of $60 to $65 per barrel of crude.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.