Amid a fuel crisis that is spiraling out of control, the notorious Mexico oil hedge this year is worth US$1.23 billion with the average export price of Mexican crude seen at US$55 a barrel, Reuters reports, citing the country’s Finance Ministry. The ministry did not specify exactly how many barrels the hedge covered.
Last year, Mexico locked in an average export price of US$46 per barrel of crude oil in its annual oil hedge, which is closely watched as the biggest in the world. During the year, the Mexican basket of crude grades hit a high of US$77 a barrel and a low of US$45.18 per barrel, but for most of the year stayed firmly above US$50 a barrel.
The hedge, or the Hacienda Hedge, is considered the biggest hedging bet on Wall Street as well as perhaps the most secretive. It has also earned Mexico—and a few large investment banks—billions since it was first made in the 1990s.
“With these actions we protect that budget … against drops in prices of oil below this level,” the Finance Ministry said in a statement. “As a result of these complementary strategies, a price of $55 per barrel was assured for the Mexican export blend in 2019.” Related: Oil Enters Bull Market As Shorts Are Wiped Out
The hedge consists of the Mexican government buying large amounts of put options from a selection of investment banks. The average that the government has spent on these put options in the last few years has been US$1 billion, Bloomberg’s Nacha Cattan writes. In 2000, Mexico began locking in prices annually and has since made a profit three times, including a US$6.4-billion windfall in 2015 after the price crash from mid-2014. For 2016, the hedge made Mexico US$2.7 billion.
Mexico’s new government is eager to increase local oil production, which has been steadily declining for more than a decade, but it also wants to export less of it and refine more at home to reduce Mexico’s dependence on imported refined products.
By Irina Slav for Oilprice.com
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