Mexico Set to Receive a $2.9 Billion Windfall From Oil Hedges, IMF Says

  • Oil exports locked in at 42% above average price of past year
  • Second straight year the price insurance has reaped a payout

Mexico is set to earn about $2.9 billion from its oil hedges for 2016, reaping a windfall from plummeting crude prices for a second straight year, according to the International Monetary Fund.

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., according to government documents. The payout for 2016 will be about $2.9 billion, the IMF said in an e-mailed response to questions on Tuesday after completing its annual review of the nation’s economy.

Mexico earned $6.4 billion from hedging in 2015, its biggest payout so far, and $5.1 billion in 2009, in the aftermath of the global financial crisis. Since it started shielding its exposure to crude prices through derivatives contracts in 1990, the Latin American country had never collected a gain two years in a row. The government spent $1.09 billion last year on put options allowing it to sell 2016 oil exports at $49 a barrel; that’s about 42 percent above the $34.43 average price for the nation’s crude mix over the past year.

"It’s been a tool that has helped the economy to smooth the negative shock from lower oil prices," said Carlos Capistran, the chief Mexico economist at Bank of America Corp. "It has given the Finance Ministry breathing room to adjust other variables. It certainly has been a good tool."

Mexico’s Finance Ministry declined to comment on the payout before the completion of the hedge, which runs through the end of this month.

Mexico Set for 2016 Windfall From Sovereign Oil Price Hedge

Despite Mexico’s hedging success, few other commodity-rich countries have followed suit. Ecuador hedged oil sales in 1993, but losses on the bets triggered a political storm and the nation hasn’t tried again. More recently, oil importers Morocco, Jamaica and Uruguay have bought protection against rising energy prices.

Hedging is a financial strategy that involves buying or selling a commodity in advance in the expectation the price will be higher or lower, depending on the position, at the time the hedging entity has to take delivery or make delivery of the goods. Put options give the buyer the right, but not the obligation, to sell an underlying commodity when it reaches a specified price.

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