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2015 Oil Hedges In Mexico Hit $6.4 Billion

30 November, 2015

Mexico is poised to receive $6.4 billion from its 2015 oil hedges,which are for 228 million barrels of oil,reported the Wall Street Journal. Designed as a way to protect the country from sudden shocks in world oil prices,Mexico’s program of annual oil hedges is poised to pay out big time this year,according to Finance Minister Luis Videgaray.

“The hedges we acquired last year to protect a price of $74.60 per barrel,which without a doubt is a higher price than what we saw during the year,will be paid in early December,” Videgaray told reporters. “Our estimate is that they will be for an amount of $6.4 billion,or about 104 billion pesos.”

According to the report,oil revenues generally account for around one-third of the federal budget and Mexico spent around $773 million on hedging contracts this year. Also,the second auction for Mexico oil drilling rights in 2015 yielded upwards of $3 billion in new investments amid stronger demand,while Grupo Mexico also announced a $1 billion oil investment this year.

The steep drop in global oil prices this year,combined with a major tax overhaul in Mexico last year,have brought the proportion of oil revenue that accounts for the federal budget down to around 20 percent,but Mexico’s government has also cut spending dramatically this year and also for 2016 in response to the lower international oil prices.

“The last time Mexico was able to cash in on the hedges was in 2009 when oil prices fell due to the global economic crisis,” writes the Wall Street Journal. “The hedges netted Mexico about $3.5 billion at that time.”

In recent years,the put options have not typically been exercised because oil prices have remained high and the Mexican government tends to be conservative when estimating oil prices,because of its fiscally responsible budget practices. In 2015 Petróleos Mexicanos,or Pemex,which is Mexico’s national oil company,exported almost 1.2 million barrels of oil every day through September for an average price of $46.40. Consequently,this year’s hedges were for 228 million barrels of oil,which covers the government’s exposure to oil prices.

“The hedges provide certainty to public finances and have been deemed worthwhile,” writes the Wall Street Journal.

Looking ahead to 2016,reports indicate that Mexico’s Finance Ministry has hedged an additional 212 million barrels of oil at $49 per barrel against a budget estimate of $50 per barrel.

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