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Mexico gets an insurance on oil price fall September 28, 2010

Posted by mytruthaboutoil in Geostrategy, Oil giants.

Mexico is taking out an insurance policy against oil prices falling next year, hedging its oil exports for 2011 at about $65-$70 a barrel as it adopts a cautious view on global economic recovery.

The world’s sixth largest oil producer hedged all its net exports at $57 a barrel this year, fearing the potential of a double-dip recession. But, for next year, bankers, traders and brokers said Mexico was locking in a sale price at a higher oil price.

The programme by Mexico is the world’s largest hedge in commodities markets and one of only a few implemented by a sovereign entity, rather than a company. Goldman Sachs, Barclays Capital, Deutsche Bank and JPMorgan are organising next year’s programme.

Brokers estimated the banks had already hedged around 100m-150m barrels and added the flows in the over-the-counter options market were continuing, suggesting the hedge programme was still being implemented. They said they expected Mexico to hedge less than 200m barrels, down from this year’s level of 230m.

Bankers said, based on current market rates, Mexico was paying a premium of between $5 and $6 a barrel for the put options – contracts that give the holder the right, but not the obligation, to sell at a predetermined price and date – putting the cost of the programme at around $1bn.

“The flows started about a week and a half ago,” said a New York broker. A London trader said: “We have seen it in the market for several days.”

West Texas Intermediate crude prices have traded between $70 and $80 a barrel for most of the past year. Mexico’s oil basket, an average of the country’s Maya, Olmeca and Isthmus crudes, trades at a discount of around $5 to the WTI benchmark.

Mexico paid $1.17bn for its hedge this year and it is unlikely to reap any benefits because oil prices have traded above the level at which it took out insurance. But in 2009 it gained about $5bn from its oil derivatives after energy prices plunged.

The government relies on oil for up to 40 per cent of its revenue. The hedge is now even more important as oil production is declining rapidly, down from 3.8m barrels a day in 2005 to 2.9m b/d this year, depriving Mexico of income.

The country has seen the oil hedge as insurance “against a really bad outcome” rather than a bet on market direction.

Last year, referring to the country’s hedge programme for 2010, Agustín Carstens, then finance minister, said he would be satisfied even if Mexico did not reap financial gain from the transaction because that would mean oil prices had stayed high.

The banks involved in the deals declined to comment. Mexico’s Ministry of Finance did not return calls seeking comment.



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