Mexico Hedges ’17 Oil Exports at $42 a Barrel Via Puts, Fund

Updated on
  • Oil revenues protected via $38 puts, $982 million from fund
  • Mexico’s program is world’s largest oil hedge for a nation

Mexico’s government hedged oil exports for next year at an average $42 a barrel, locking in protection against low crude prices.

The government spent $1.03 billion on put options that give it the right to sell 250 million barrels at $38 per barrel, with an additional $982 million from its budget stabilization fund to guarantee $42 a barrel, the Finance Ministry said Monday in a statement.

The 2017 hedge comes as Mexico stands to take in about $3 billion from this year’s hedge price of $49 per barrel, which was put on from June to August 2015, if prices remain around current levels. That follows last year’s record payout of $6.4 billion after locking in crude sales at $76.40 in 2015. Mexico’s oil mix climbed 1.3 percent on Friday to $41.45 a barrel and has more than doubled from a 13-year low in January.

"If they think they have to protect that much, it means that their outlook for oil is pretty bleak," said Luis Maizel, co-founder of LM Capital Group, which has $5.6 billion under management including bonds of state-owned Petroleos Mexicanos. "It’s healthy in terms of eliminating the uncertainty of what will happen with oil."

World’s Largest Oil Hedge Set to Make Billions for Mexican State

Mexico has spent an average of almost $1 billion a year over the past decade buying put options through deals with banks that have included Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, BNP Paribas SA, Barclays Plc and HSBC Holdings Plc, according to government documents. The put options were acquired between May 13 and Aug. 25, during which the average price of West Texas Intermediate crude was $46.52. Seven counterparties participated in the deal, according to the statement.

Despite Mexico’s hedging success -- it received $5 billion in 2009 after oil prices plunged -- few other commodity-rich countries have followed suit. Ecuador hedged oil sales in 1993, but losses triggered a political storm and the nation never tried again. More recently, oil importers Morocco, Jamaica and Uruguay have bought protection against rising energy prices.