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As the oil price crash squeezes oil companies across the globe, Mexico’s Hacienda Hedge is set to deliver $6.2 billion to the Latin American country, Mexico’s President Manuel Lopez Obrador said on Wednesday in Mexico City, according to Bloomberg.
Mexico has been insulated from this week’s extremely volatile oil prices, in that the hedge allows Mexico to sell its oil at a price that was determined earlier—prior to the price crash. In this case, Obrador said today, Mexico hedged at $49 per barrel. The current Mexican basket price is hovering a bit above $7 per barrel—a fine save for Mexico.
Mexico employs the hedge to some extent every year, although some years it benefits more than others.
This year the benefits of the hedge will be invaluable to Mexico’s oil industry, which otherwise would have had a rough go of things at $7 per barrel for its oil exports.
Of course, the hedge costs Mexico upfront—it has typically paid about $1 billion per year for the hedge ($1.23 billion in 2018), for the privilege of locking in a fixed price negotiated with banks and major traders. If market oil prices rise above that negotiated price, Mexico is able to sell its oil for those higher market prices. If oil prices fall, however, Mexico can sell its oil at the negotiated rate.
This year, it turned out to be well worth its $1 billion spent.
While it is unclear exactly how many barrels Mexico hedged at that $49 price, it typically hedges hundreds of millions of barrels.
It is not known which banks are at the wrong end of this hedge but Citi, JPMorgan, and Goldman Sachs have been parties to the hedge before, and Shell and BP have also gotten into the action before. Whichever banks bet against the Hacienda hedge for 2020 will likely see a sharp hit to their bottom line, dwarfing the proceeds they took in during negotiations.
By Julianne Geiger for Oilprice.com
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Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.