Mexico has concluded its vast oil hedging program for next year, paying more than $1 billion to guarantee it will get at least $49 a barrel for about half of its exported crude in 2016.
Announcing the unusually early completion of the biggest sovereign oil derivatives trade in the world, Mexico’s finance ministry said late on Wednesday it had bought options based on Maya and Brent crude oil prices that will cover 212 million barrels of oil, at a cost of $1.09 billion.
Mexico is “very unlikely” to reopen the hedge, a source close to the operation told Reuters, adding the program centered on Maya crude. Counterparties to the program included Barclays and JPMorgan, the source added.
The program, a longstanding part of the country’s strategy for safeguarding oil revenues from market volatility, ended on Aug. 14, the ministry said, suggesting it had purchased most of the options as oil prices entered a second deep slump.
Oil traders who watch the market carefully for any signs of Mexico-related trades, which can be large enough to affect prices, said they first noticed the hedging in late July, at least a month earlier than it usually enters the market.
With U.S. crude plumbing six and a half year lows at nearly $40 a barrel and many analysts bracing for a prolonged downturn, Mexico paid a higher premium for lower-priced options this year.
In its hedge program for 2015, Mexico ensured an average oil price of $76.40 per barrel, covering 228 mln barrels of crude oil at a cost of $773 million.
Mexico has long been one of the few major oil producing nations that uses derivative markets to hedge, a policy that paid off handsomely after the 2008 oil price crash and has also helped protect this year’s budget revenues. Oil sales have traditionally made up about a third of Mexico’s budget.
The current price of crude oil is $38.15 per barrel, the ministry said, significantly below the $79 per barrel that the government had estimated for its 2015 budget.
Buying put options, rather than simply selling forward production, costs more up front for Mexico, but also allows it to enjoy the upside if prices rebound next year.
The trading is also a boon for the banks involved in executing the deals. The finance ministry does not comment on its counterparties, but another person familiar with the transactions said this year’s banks included Morgan Stanley, Citigroup Inc, JPMorgan Chase & Co and Goldman Sachs Group Inc.
Mexico, the world’s 10th biggest crude producer, pumps about 2.3 million barrels per day (bpd) and exports around half of that. The 2016 hedge is equivalent to around 580,000 bpd.
In March, Mexico announced that it would cut 2016 spending by 4.3 percent because of lower crude production and a drop in oil prices.
Last week, a finance ministry official told Reuters that Mexico will need to make additional cuts to the 2016 budget amid lower crude output.
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