Mexico starts annual oil hedging with $75/b floor price - report
Quantum Commodity Intelligence - Mexico has started its huge annual oil hedging programme, where the government will use complex derivative instruments to lock in a price floor and protect future revenues against a price reversal, reported Bloomberg.
The programme is historically conducted in secrecy amid direct negotiations with Wall Street banks and oil majors offering services as counterparties.
The program covers the first half of 2023 and would protect revenues if oil retreats below $75/b, said one of the Bloomberg sources, who asked not to be named because the trade is private.
The so-called Hacienda Hedge is the largest sovereign oil hedge in the world, typically costing $1 billion and historically executed by some of Wall Street's biggest banks.
While it protects against falling prices for the OPEC+ member, whose economy is heavily dependent on oil income, the hedge can also yield substantial returns in the event of an oil price retreat. It earned Mexico $2.38 billion in 2020 when oil prices crashed and $6 billion in 2015, according to Bloomberg figures.
Mexico has become increasingly secretive about the hedge to prevent traders from trying to front-run it, which could increase the cost.
This year, the deal is being executed largely through oil majors, said one of the sources.
While Mexico has historically used big banks such as Goldman Sachs to run the program, oil majors have taken on a greater role in recent years as their physical assets – which act as a natural hedge – allow them to keep more risk on their books.
Mexico's hedge, which typically covers 200-300 million barrels a year, offers downside protection and some financial stability to the country.
The $75/b level is higher than in recent years, noted the report. For a portion of its 2022 hedge, Mexico locked in prices at $60-$65/b, while in 2019, it completed the hedge at $55/b.
Oil benchmarks remain in relatively steep backwardation with the Jan23-Jun23 Brent spread, covering the first half of next year, currently at around $7/b.
