Mexico’s 2017 Oil Hedges Lock in $9.5 Billion Value: Takeaways

  • Average barrel strike price is 8.3% below most recent close
  • Mexico oil prices hedged at lowest level since at least 2008

Mexico said it’s locked in the equivalent of $9.5 billion of oil revenue for 2017, buying hedges to sell the nation’s crude at the lowest price since at least 2008. 

The purchases were completed between May 13 and last week, the Finance Ministry said. The country’s annual trade represents the largest sovereign oil hedge in the world.

After spending most of the year declining to comment on the program out of concern it could hurt the nation’s negotiating position, Mexico finally showed (most) of its cards Monday. Here are some takeaways from the big announcement.

MEXICO LOOKS LIKE AN OIL BEAR

  • Mexico bought put options that give it the right to sell oil for $38 a barrel next year based on Mexico’s oil export mix. That’s 8.3 percent below the closing price of $41.45 a barrel Friday, and may signal the Finance Ministry doesn’t expect prices to go up much from here, even though the price has more than doubled from a 13-year low in January.

MEXICO IS HEDGING MORE OF ITS OIL

  • Mexico hedged 250 million barrels of oil via put options, the most since 2009. Given that Pemex’s production has been declining for more than a decade, that also means they’re relying on oil hedges to cover an increasing percentage of crude production.

MEXICO’S STRIKE PRICES KEEP FALLING

  • Mexico’s option strike price is the lowest since at least 2008, reflecting the challenges of the global oil market. But maybe that’s not such a bad thing. Mexico received a payout of more than $5 billion from the 2008 program, a record that held until it took away $6.4 billion in revenue last year. Mexico stands to receive about $3 billion from the hedge on 2016 exports at current prices.

THE RAINY-DAY BUDGET FUND KEEPS GROWING

  • Mexico’s oil stabilization fund had 117 billion pesos ($6.28 billion) at the end of the second quarter, more than three times the balance from when the Finance Ministry used it to supplement the oil hedges and help protect export revenues for 2015. That’s in large part due to the 70 billion peso deposit earlier this year from a central bank surplus stemming from exchange rate gains on Banco de Mexico’s international reserves.

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