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Mexico’s Oil Hedge Takes Next Step

After questions were raised about Mexico’s billion-dollar stalled oil hedge surfaced last month, Mexico is now moving forward with the lucrative hedging program, exclusive Reuters sources said on Thursday.

Mexico is asking banks for quotes, Reuters sources familiar with the matter said, as financial oil options contracts for next year have risen in recent days.

The sources, one on Wall Street and the other a Mexican congressional source, shared with Reuters that banks are already submitting offers for the hedge, after Mexico had requested that they do so.

The hedge is the largest annual oil hedge the world, and has been a major source of revenue for the country, protecting revenue streams even when oil prices are low.

Last year, Mexico spent $1.23 billion to protect its 2019 revenues, locking in a fixed price of $55 per barrel. In 2015 and 2016 when oil prices tanked, Mexico did well, profiting billions of dollars from oil sales that it would otherwise not have received by negotiating up front pricing that turned out to be significantly higher than the actual market price.

Mexico has always kept the details of its oil hedge a complete mystery, maximizing its leverage in order to maximize these profits.

So while we know that Mexico’s hedge will soon begin, we do not know the size of the hedge, nor the price at which it will be hedged. It’s hedge typically ranges between 200 million and 300 million barrels, but due to the increased volatility of the oil markets this year, the actual hedge may vary significantly from historical trends.

Delays to Mexico’s hedge earlier this year caused speculation as to whether the hedge may actually go through this year. Delays were caused not only by increased volatility, but also pricing changes of Mexico’s Maya crude, which needed to be tweaked to accommodate the new lower sulfur rules that will go into effect in January next year.

By Julianne Geiger for Oilprice.com

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