Bloomberg News

Mexico Hedges 2013 Oil Against Steep Price Falls

October 24, 2012

(Corrects Rodriguez’ job title in second paragraph in a story originally published on Oct. 15)

Mexico, the third-largest supplier of oil to the U.S., is hedging some crude exports for 2013 to ensure the government’s revenue if prices drop sharply.

Next year’s hedging program will cover enough “so that when it falls below the price in the economic package you don’t have to cut spending,” Deputy Finance Minister Gerardo Rodriguez said Oct. 13 in an interview in Tokyo, where he was attending annual meetings of the International Monetary Fund. Reports of Mexico being partly exposed if prices fall below $60 a barrel next year are incorrect, he said.

Mexico’s hedging contracts are included in annual budget discussions when government officials estimate oil revenue, which accounts for about a third of the budget. Mexico’s hedging program is usually the world’s largest of its type. The Financial Times reported on Sept. 25 that Mexico will be exposed if 2013 oil prices drop “much below $60” a barrel after buying so-called put spreads for the first time.

Investors buy and sell put options on a commodity in a so- called collar strategy using put spreads. The tactic enables them to avoid losses if spot prices for the commodity fall within a range. While setting a floor in the range lowers the hedging costs for the investor, it exposes the holder to further risks if the prices drop below that level.

Locking in Prices

Reports of Mexico buying collar structures “aren’t true,” Rodriguez said.

Last year Mexico paid $1.17 billion to lock in prices for 2012 exports at $85 a barrel, a 44 percent increase from the previous year, when the country paid $812 million to buy hedges for 222 million barrels of oil.

The Mexican mix of oil for export has traded at an average of $103.65 a barrel this year, 22 percent higher than the estimate of $84.90 a barrel for this year’s annual budget, according to data compiled by Bloomberg.

Canada and Saudi Arabia are the two largest suppliers to the U.S., according to the Energy Information Administration.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net; Carlos Manuel Rodriguez in Mexico City at carlosmr@bloomberg.net.

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net.


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