Daily Management Review

Mexico earned $ 2.65 billion on oil hedging programme


12/08/2016


Government of Mexico has received $ 2.65 billion of income from oil price hedging, done earlier to protect the budget from falling commodity prices, the country's Ministry of Finance reported.



Rob Young
Rob Young
This year, the government insured the price of oil at $ 49 per barrel for the amount of 212 million barrels, while the budget implied the price of $ 50 per barrel. The difference of $ 1 per barrel, not secured by hedging, will be covered from the stabilization fund.

The funds received in US dollars will be converted into Mexican pesos by the Bank of Mexico.

Average price of Mexican oil in January-October 2016 amounted to $ 34.58 per barrel. On Tuesday, Mexican oil was trading at $ 43.32 per barrel.

Mexico for the second year in a row receives income from hedging transactions in the oil market. In 2015, the government received a record $ 6.3 billion after hedging oil at $ 76.40 per barrel, while the real price averaged about $ 43. 

In 2017, the country insured 250 million barrels at $ 38 per barrel for Mexico’s oil basket, equivalent to about $ 45 per WTI barrel. At the same time, the authorities budgeted $ 42 per barrel of Mexican oil.

Mexico has suffered from falling production along with decline in oil prices over the past two years. All of this forced the government to cut the budget. As a result, oil revenues and related taxes and charges now account for less than 20% of federal budget revenues, whereas the proportion numbered more than a third in previous years.

State oil company Petróleos Mexicanos exported an average of 1.2 million barrels of oil per day in the period from January to October this year. However, exports will probably be reduced to less than 1 million barrels a day in the next year.

Traditionally, Mexico hedges oil prices in summer through a series of transactions with a variety of banks, including Barclays Plc, BNP Paribas SA, Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. In August 2016, Mexico also bought insurance on international markets to protect itself from low oil prices in 2017. Average annual price of oil in the next year is set at $ 42 per barrel, covering production capacity of 250 million barrels. To sign the deal, the authorities had to carry out 46 operations in the international insurance market and pay more than $ 1 billion.

Today, oil production of the Latin American countries is about 2-2.2 million barrels per day. Ten years ago, state company Pemex produced by 3.38 million barrels daily, and Mexico was included in the top ten countries – oil producers. Today, however, the Mexican oil sector is feeling worse due to low oil prices and economic situation in the country. Therefore, the hedging program is a necessary measure. The Ministry of Finance of Mexico believes that it protects expenditure part of the federal budget.

The authorities are trying to reverse the situation. In August, they put up for sale 12 new sites for development and production of hydrocarbons, each is approximately 350 square kilometers. Mexico hopes the sale will help raise at least $ 5 billion investments within tenders for terrestrial deposits. In October, the country tried to increase oil export of black gold at 22%, yet production, by contrast, decreased. 

source: nytimes.com






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