But what does this mean for the country in context?


Oil sales hedging is not a particularly popular activity for countries, but luckily for us, Mexico is not one to be influenced by the crowd. Last year, the country hedged 228 million barrels of oil at US$76.40/b, guaranteeing sales at almost US$30/b higher than the average price over the past year. This decision will now see Mexico awarded US$6.8 billion, according to data compiled by Bloomberg, a much needed cushion for a country that relies on oil for about a third of its revenue. This figure is only an estimation, as some details of the hedge are not made available to the public, and the price of oil may still change before the payment is due in December. The 2015 oil hedge was conducted with banks including Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup, Morgan Stanley, BNP Paribas SA, Barclays Plc, and HSBC Holdings Plc, all of which will see their profits dwarfed by this unexpected drop. Fortunately for them, it is also typical for banks to hedge themselves in the futures market.


The inflow is expected to surpass the record from 2009, when the government allegedly received US$5.1 billion after the global financial crisis caused oil prices to plunge. In fact, the Mexican oil basket, which is a weighted average of the prices of the three different petroleum blends produced nationally, fell on 18 November to US$33.28, its lowest level since December 2008.


Mexico’s annual hedge is closely monitored by the market, as it is probably the largest undertaken by a national government, and few other countries venture into oil price hedging territory. Ecuador did so in 1993, only for a political storm to trigger substantial losses, thus deterring the country from ever doing so again. Colombia, Argentina, and even Texas, are other areas that have experimented with hedging programs. Recently, Morocco and Jamaica have followed in Mexico’s footsteps, hedging against rising energy prices, but only the Mexican authorities do so on a yearly basis since 1990. Standard & Poor’s calls this “a very good move from the risk-management perspective”.


Continuing this fruitful strategy, the country chose to hedge its 2016 oil sales in August, rather than the typical November, seeking to lock in higher prices. Next year’s hedge gives Mexico the right to sell 212 million barrels at an average of US$49 per barrel, a price currently higher than market prices for next year, as can be seen on the graph below. The hedge cost was also affected by the significant slump experienced by oil prices, with Mexico having to pay US$1.09 billion this year for the 2016 hedge as opposed to the previous US$773 million invested in the 2015 hedge. The Ministry of Finance said the options would cover the portion of next year’s budget that is vulnerable to lower crude oil prices.



* The Mexican oil basket is being compared to WTI, another oil reference that is typically more expensive than Mexican mixes. Data retrieved from CME group.


One may wonder what exactly an inflow of US$6.8 billion may mean in the bigger picture. It is a comfortable cushion to land on, but is it enough? To put this figure into context, just last month, PEMEX reported losses amounting to US$10.2 billion for the third quarter, the largest quarterly loss the company has experienced to date. This is the 12th consecutive quarter in the red, and the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, claims the parastatal’s crisis only “appears to be getting deeper and deeper”. In other words, the US$6.8 billion are warmly welcomed, but will do little to compensate for Mexico’s PEMEX-driven losses. Hopefully, the fourth phase of Round One, in which PEMEX will participate in joint ventures with private companies, will allow the NOC to lessen its losses.


Sources: Bloomberg, Bloomberg, Bloomberg, CME Group


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