Mexico has spent more than $1bn to lock in prices for oil exports next year to help protect public finances as its underperforming economy faces intensifying international headwinds, including the timing of a US rate rise and the US elections.
The government’s annual hedging programme, designed to guard against market volatility and the prospect of oil price falls, seals in a price of $42 a barrel for 2017. The level is below this year’s hedged prices of $49, and $76.40 in 2015, as oil market weakness extends into a third year.
Of that, $38 a barrel is covered by put options purchased from Wall Street dealers in one of the world’s biggest sovereign oil derivatives trades. The remaining $4 will be covered from money set aside in a government stabilisation fund.
The programme covers 250m barrels of crude — more than last year’s 212m. Marco Oviedo at Barclays linked the decision to the liberalisation of petrol prices in Mexico from next year. Mexico imports half its fuel from the US.
The government kicked off the hedge on May 13 after Mexico’s Maya crude stream had sharply rallied from January lows below $20 a barrel. Maya crude sold for $41.45 a barrel on Friday.
It wrapped up the $1.03bn programme on Thursday, after 46 trades with seven derivatives dealers who the finance ministry did not name. In previous years, dealers have included banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase.
Mexico’s pioneering use of an annual oil hedge has been going on for a dozen years and used to be one of the best-kept secrets in the market. But in the past couple of years, signs of its options deals have leaked out on new public data warehouses mandated by the Dodd-Frank financial reforms.
The Mexican government this year pressed counterparties to avoid disclosing the terms of its hedging deals, according to people familiar with the transactions. Because of the size of the programme, Mexico risks paying more for options contracts if traders try to front-run them. Some deals were booked through bank branches that are not subject to US reporting rules, people familiar with the matter said.
Yet some hints emerged. The market buzzed over a series of put options to sell crude oil between $35-$45 a barrel that traded on May 20, according to US swap data repository records. The records described in vague terms that the crude oil came from an “other commodity region”.
Luis Videgaray, finance minister, said that the hedge “gives us certainty that public finances are protected against the current adverse international scenario”.
Oil income used to represent a third of Mexico’s national budget, but improvements in boosting overall tax revenues in a country where the tax haul has been traditionally low have now cut that reliance on oil to about a fifth, easing pressure on state coffers at a time of crude price volatility. The 2015 hedge netted Mexico a record windfall of more than $6bn last year.
However, the outlook is not all plain sailing for a government which saw the economy contract in the second quarter for the first time since 2013. That prompted it last week to cut its 2016 growth forecast to between 2 and 2.6 per cent, the second time this year that it has revised the expectations downwards.
Source: - Ft.com
