Shell participated in protecting Mexico against low crude prices in 2017, according to four people with knowledge of the matter, the first time an oil company has taken part in the world’s largest commodities hedging program.
The Mexican government spent $1 billion buying put options — contracts that give it the right to sell at a predetermined price — to lock in an average price for its export basket of $38 a barrel for next year. Shell’s trading unit was one of the seven counterparties to the Mexican government, the people said, asking not to be identified because the information is private.
Shell’s involvement is the first known participation of an oil trader in the hedge since Mexico started to lock in prices regularly 15 years ago. It shows that the retreat of some banks from commodity trading because of increased post-crisis regulation is opening up space for non-financial players.
Alberto Torres, head of public credit at Mexico’s finance ministry, declined to name any of the counterparties. But in an interview, he said Mexico looks for partners “that are solid, who can manage their own risk in an efficient way, who are in the market each day. In recent years, the number of participating counterparties has grown.”
Shell declined to comment. Europe’s largest oil company, Shell describes its trading arm on its website as “one of the largest and most experienced energy merchants in the world.” The company says it trades the equivalent of 13 million barrels of oil per day — more than double the size of the world’s largest independent oil trader, Vitol Group.
Shell trades so many derivatives the company is one of the only three non-financial firms registered as a swap dealer under the U.S. Dodd-Frank Act. Nearly 100 financial firms are also swap dealers, including all the major Wall Street banks. The other two non-financial firms are rival oil company BP Plc, which also operates a large in-house trading unit, and agricultural behemoth Cargill Inc.
Mexico has traditionally used banks including JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley, Barclays Plc, Citigroup Inc. and BNP Paribas SA for its annual hedge, according to government documents. The program is the largest sovereign petroleum hedge, and often roils the markets.
Mexico bought the put options for 2017 between May 13 and Aug. 25 covering oil exports worth 250 million barrels, the Mexican government said Aug. 29.
On top of the put options at $38 a barrel for the Mexican oil basket — which equates to about $45 a barrel for West Texas Intermediate — Mexico has set aside nearly $1 billion from its budget stabilization fund to guarantee the government will effectively receive $42 a barrel in oil revenues next year.
The country’s budget for 2017 is based precisely on $42 a barrel. Mexico’s oil mix fell 1.4 percent to $38.96 a barrel at 2:37 p.m. in Mexico City. Last year, the country had locked in 2016 prices at $49 a barrel.
The Latin American country has received handsome payouts from its oil guarantees, earning a record $6.4 billion in 2015 and $5 billion in 2009. If oil prices remain at current levels, Mexico is set to earn about $3 billion from the 2016 hedge.
Despite Mexico’s hedging success, 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, but their deals had been relatively small.
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