The World's Most Exiting Oil Hedge Nears Completion

Despite challenges, Mexico is close to completing its notorious oil hedge, unnamed sources told Reuters, adding that the government had used the services of Goldman Sachs, JP Morgan, Citigroup, BNP Paribas, and Shell.

The Mexico oil hedge is the most famous one, with investment banks vying every year for a role in it. Worth around US$1 billion, it is done every year and is believed to be the largest oil trade.

The deal is the most secretive 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.

This year was unusually challenging for the hedge because of the excessive volatility of prices, Reuters noted, as well as because the Mexican government changed the pricing formulas that underpin the country’s oil exports.

This year’s oil sales in Mexico were hedged at US$55 per barrel, with the total value of the put options bought standing at US$1.23 billion.

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It remains unclear how big next year’s hedge is since the government’s silence on the sensitive matter is as notorious as the hedge itself. Opinions also differ on how close to completion the deal is, with some putting it at over 90 percent while others see it closer to 75 percent.

Mexico’s Deputy Finance Minister Gabriel Yorio said the government was setting $49 per barrel as the price, on whose basis it would calculate its 2020 oil export revenues in the draft budget that is currently the subject of debate and has yet to be voted on.

“This is a price at which we can control the risks of a fall in the oil price and, obviously, if the price is higher, we’ll have higher income,” Yorio told the Mexican Congress. “So I believe we are covered against the downside risk.”

By Irina Slav for Oilprice.com

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