OL: Mexican Government Hedges Against Oil Prices in 2010
It has emerged that the Mexican government has spent $1.17 billion buying put options to sell its oil at $57 per barrel in 2010. The move, which was announced by the Finance Ministry, has been taken to hedge against a possible revenue shortfall should volatile oil prices take a drop next year. Following finance minister Augustin Carstens contrarian move in mid-2008, when oil prices were rallying near the $150 a barrel mark, to hedge 2009 export prices at $70 a barrel, a decision that has resulted in a $5 billion windfall for Mexico, the market is casting a close eye over Mexico's latest hedging strategy.
The consensus among forecasters is that oil prices will continue to recover next year, after having traded sideways for sometime now. Mexico's move unveils a keen awareness of the potential price risks to the downside for oil, against the backdrop of increasing fears of a double-dip recession. As Mexico's oil production and export levels continue to decline, the need to insure against a fall in revenues becomes ever more acute for Mexico, which is heavily dependent upon its national oil company Petroleos Mexicanos (otherwise known as Pemex) for around 40% of Federal government revenue.
Minister Carstens has outlined that he considers the move as an insurance policy, rather than reflecting a view that prices will actually fall below $57 a barrel. Carstens said that if Mexico was comfortable with the idea of not receiving any benefits from the transaction, as that would mean prices had remained above $57 a barrel. The Federal government has based its 2010 budget on a price of around $59 a barrel. By hedging at $57 a barrel, therefore, the state has secured a price closely in line with its own revenue generation target. In addition, the government will have saved money by betting so low, as options with a strike price significantly below market expectations are much cheaper.
In the past Mexico has tended to hedge around 20-30% of its crude exports. For 2010, however, it has upped this hedging to around 230 million barrels. It is expected that the move will not result in anything like the windfall that Mexico saw this year but if there is a collapse in oil prices, Carstens' move will no doubt be seen as another example of astute risk management by the Mexican government.
