Mexico Hedges 2016 Oil Exports at Average of $49 Per Barrel

(Bloomberg) -- Mexico’s government hedged oil exports for next year at an average $49 a barrel, locking in protection against low crude prices, the nation’s Finance Ministry said.

Mexico spent $1.09 billion for the put options, giving it the right to sell 212 million barrels at the hedged prices, the ministry said Thursday on its website. That’s more than the $773 million Mexico spent last year on hedging, reflecting the almost 60 percent slump in the oil price over the past year.

The ministry said the options, purchased in 44 transactions from June 9 to Aug. 14, will cover the portion of next year’s budget that’s vulnerable to lower crude prices. The government is due to send its full budget proposal to Congress by Sept. 8. Mexico traditionally implements its hedge later in the year, often finishing as late as November.

The price Mexico negotiated for 2016 is 36 percent lower than the $76.40 a barrel hedge obtained for this year. Still, $49 a barrel is higher than current market prices for next year. The West Texas Intermediate 2016 calendar swap, which reflects the average price U.S. crude oil for next year, stood at $47.54 a barrel on Thursday.

Mexico’s hedging program has often roiled energy markets since its introduction in the early 1990s as banks acting on behalf of the country sell futures to cover their own options positions.

“This Mexico hedge probably has exacerbated the sell-off in long-dated oil contracts we have seen since June,” Torbjoern Kjus, an analyst at DNB ASA in Oslo, said by e-mail.

Forward curve

Oil futures for delivery next year and further out have weakened in recent weeks. The price for one-year WTI forward contracts on Thursday dropped to $47.57 a barrel, which would be the lowest closing price in 10 years.


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