Mexico Oil Hedge

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Mexico hedges against falling oil prices- Financial Times

By Gregory Meyer in New York and Javier Blas in London

Published: December 8 2009 19:17 | Last updated: December 8 2009 19:17

Mexicohas taken out a $1bn insurance policy against oil prices falling nextyear, a clear signal that commodities producers remain wary about thethreat of a double-dip recession.

The world’s sixth largest oil producer said on Tuesday that it had hedged all its net oil exports for 2010, by buying protection against oil prices falling below $57 a barrel.

“Wewant this as an insurance policy,” said Agustín Carstens, Mexico’sfinance minister. “If we don’t collect any resources from thistransaction, it’s OK with us.” That would mean the oil price hadremained above $57 a barrel, he added.

Mr Carstens suggested hewas not expecting prices to fall that low, but added: “More thananything, it’s a hedge against a really bad outcome.”

The move follows a successful hedging strategyat $70 this year which netted Mexico more than $5bn on the back of lowoil prices between January and June. Although that figure is lower thanexpectations because of recent high oil prices, it still representsmore than 7 per cent of Mexican government revenues this year.

Barclays Capital, Deutsche Bank, Goldman Sachs and Morgan Stanley arranged this year’s hedge. Bankers said Barclays Capital was leading next year’s programme.

MrCarstens, joined by senior executives from the banks, said Mexico’shedging showed that derivatives, “when used responsibly”, could be“very useful”. Mexico bought put options – contracts that give theholder the right to sell oil at a predetermined price.

His view contrasts sharply with recent comments made by seniorChinese officials, who criticised some of the same banks for sellingderivatives products, including oil hedges, to state companies. Manysuffered heavy losses this year.

Some of the biggest losses were suffered by airlines andshipping companies which purchased financial derivatives that forcedthem to pay oil prices above $100 a barrel, even when prices fell aslow as $35 a barrel.

Mexico has based its budget next year on an oil price of about $59 a barrel.

OlivierJakob, of the Swiss-based consultancy Petromatrix, said there waspotential for a drop in oil prices in 2010 unless demand recoveredmeaningfully. “The fundamental supply and demand picture looks weak,but the weakness of the US dollar and financial flows are supportingoil prices right now,” he explained.

Mexico, which relies onoil for up to 40 per cent of government revenue, has hedged far more ofits oil exports than in the past. Normally Mexico hedged 20-30 per centof its exports, bankers said.Next year it has hedged 230m barrels ofoil.

Copyright The Financial Times Limited 2009