To lock in 2023 revenue, Mexico begins “secret” annual oil hedge


Mexico has begun its massive annual oil-hedging program, which typically draws Wall Street banks such as Goldman Sachs Group Inc. and seeks to lock in crude revenues.

The nation is taking on market positions to insure its 2023 oil exports against a price downturn, according to people familiar with the matter. The program covers the first half of the year and would protect revenues if oil falls below $75 a barrel, said one of the people, who asked not to be named because the trade is private.

The so-called Hacienda Hedge is the largest sovereign oil hedge in the world, typically costing $1 billion and historically executed by some of Wall Street’s biggest banks. While it serves as insurance against falling prices for the OPEC+ member, whose economy is heavily dependent on oil income, the hedge can also yield massive returns: It earned Mexico $2.38 billion in 2020 when oil prices crashed and $6 billion in 2015.

Mexico has become increasingly secretive about the hedge to prevent traders from trying to front-run it, which could increase the cost. The positions can also move oil prices. Brent’s December-December spread widened on news of the 2023 program, breaking out of its trading range as the market digested the move.

Mexico’s finance ministry did not immediately respond to a request for comment.

This year, the deal is being executed largely through oil majors, said one of the people. While Mexico has historically used big banks such as Goldman Sachs Groups Inc. to run the program, oil majors have taken on a greater role in recent years as their physical assets — which act as a natural hedge — allow them to keep more risk on their books.

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Crude prices have been extremely volatile of late, with global benchmark Brent rallying above $139 a barrel in the spring only to tumble below $78 in the fall. Many analysts including at Morgan Stanley and UBS, expect oil prices to reach $100 or more in 2023 as the market remains tight.

Mexico’s hedge, which typically covers between 200 million and 300 million barrels, offers downside protection and some financial stability to the nation. The $75-a-barrel level is higher than in recent years: For a portion of its 2022 hedge, Mexico locked in prices at $60-$65 a barrel, while in 2019, it completed the hedge at $55.

Source: El Financiero

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