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Shell Becomes First Company to Join Mexican Hedging Program

Offshore oil rig

Royal Dutch Shell has begun participating in Mexico’s massive hedge against low oil prices in 2017, according to four sources cited by Bloomberg on Thursday.

The move makes Shell the first private oil company to take part in the world’s largest commodities hedging project.

Mexico began to fix its oil prices in advance through put contracts 15 years ago, though the country has not allowed private actors to take part in the program before.

Current contracts for 2017 — worth approximately $1 billion — have locked an in average price of $38 for every barrel of Mexican crude exported. The government has set aside an additional $1 billion as a budget stabilization fund to ensure the country effectively earns $42 a barrel - funding the 2017 federal budget.

Still, the Mexican economy has suffered from low oil outputs and revenues that have steadily decreased since the oil price crisis began in 2014.

State-run oil giant Pemex, which finances roughly 20 percent of the federal budget, reported record low production in July, in addition to a fifteenth consecutive quarterly loss. As a result, the government may be swayed away from hedging and towards budgetary restraint, as it has via a recent string of austerity measures.

Oil futures for 2017 had been the highest in June, which is apparently when Mexico began its most recent hedging strategy. Then, Brent prices stood at $53 a barrel, roughly $10 dollars higher than the current price.

Bloomberg said Shell’s participation points to the retreat of banks in commodity trading after increased regulation came into effect following the economic crisis of 2008. Non-financial players have begun dabbling in areas previously exclusive to financial institutions.

Shell declined to comment upon request from Bloomberg.

The Mexican government has earned $3 billion from its oil hedging tactics during the first half of this year, according to previous estimates, and in 2015, it earned a total of $6.4 billion by employing the same strategy.

By Zainab Calcuttawala for Oilprice.com

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