Mexico will hedge its oil production against low prices, the government said in its budget proposal for next financial year, and Pemex will conduct its own hedge.
Reuters reports that the Finance Ministry had referred to the hedge as one of several “fiscal shock absorbers” to prevent adverse effects on public finances from too low international oil prices.
The shock absorbers, according to the proposal, envisaged “a strategy of oil hedges contracted both by Pemex and the federal government to cover oil income against reductions compared to the price,”
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.
Earlier this year, in July, Reuters reported that Wall Street had started preparing for the Mexican hedge. The agency quoted traders and brokers as saying crude oil future and options has seen an increase in the past week, which suggests that the time of the hedge was near.
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.
The 2020 budget proposal has set a target price of US$49 per barrel for oil exports and while the government has not yet agreed the price per barrel for the hedge, the budget price suggests increased wariness of oil price fluctuations and the prospects for benchmarks in the near term.