Mexico Hedged Oil Prices at $49 Last year

Mexico is on track to receive billions of dollars from its 2016 sovereign oil hedge, the first time it will reap the windfall two years in a row, according to data compiled by Bloomberg.

The potential payout — after Mexico already got a record $6.4 billion in 2015 — is likely to sharpen the market’s attention to the Latin American nation’s effort to lock in prices for 2017. Mexico usually hedges in midsummer against a drop in oil through a series of deals with banks that in the past have included Goldman Sachs Group Inc. and JPMorgan Chase & Co. 

The oil price crash has spurred President Enrique Pena Nieto’s administration to cut spending to preserve investor confidence in Latin America’s second-largest economy, behind Brazil. While the oil hedge helps cushion public finances, analysts believe the government can’t count on it forever.

“The Mexican government has done a good job at buying these put options because they have helped to smooth the transition of public finances towards lower oil prices, but it’s just breathing room,” said Carlos Capistran, chief Mexico economist at Bank of America Corp. “This buys the government time to think about the best way to go about expenditure cuts.”

Last year, Mexico locked in prices for 2016 at $49 a barrel, buying put options which give the country the right, but not the obligation, to sell at a predetermined price. The banks that sell the options to the government typically also hedge themselves in the futures market.

via Bloomberg

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza