Speculation on Mexico’s Oil Hedging Adding Volatility

Two big trades in oil options worth nearly $60 million last week boosted volatility in that market and revived speculation among traders that U.S. producers are placing hedges to guard against another price rout this fall.

Hedging for future production now is prudent, some said, as trading ahead looks to remain rangebound. However, dealers said bearish fears have been revived because supply is due to swell when refineries start fall maintenance just as a slug of imports is due to hit the U.S. Gulf Coast.

The two sizeable puts, equivalent to almost 1 million barrels of crude, expire in November next year and give the holder the right to sell at $53 per barrel if prices drop lower than that, according to data from the Depository Trust & Clearing Corp (DTCC).

The identity of the buyers was not known. Traders and bankers said the deals bore the hallmarks of Mexico’s finance ministry and its national oil company Pemex. The Mexico hedging program is the most widely-watched operation by a nation in commodities markets.

Mexico’s finance ministry declined to comment on the hedges.

After nearly two months of rangebound oil prices and lackluster trading, other drillers also have started to do more hedging, trying to lock in prices and protect revenue for output next year and even 2017, four sources familiar with the money flows said.

via Reuters

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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, Alfonso Esparza 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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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