Oil in Global Economy Series: Mexico announces $1.25 billion oil hedge for 2018

According to data released by Mexico’s finance ministry, the country has spent around $1.25 billion, equivalent to 24 billion pesos to hedge oil price in 2018. It is a more than 20 percent increase in its 2017 budget when the country spent around $1.03 billion to hedge oil price. In recent years, Mexico has spent on an average $1 billion per year to hedge falling oil price. The 2018’s transaction reportedly involves buying put options, which provides the buyer with a right to sell at a pre-determined higher strike price when the price is below the strike. The put options would expire worthless if the strike remains below the prevailing market price. Deputy Finance Minister Vanessa Rubio said in mid-October that Mexico completed its annual oil hedge for 2018.  

Initially, the finance ministry proposed the public budget projecting $46 per barrel export price. However, the ministry revised that estimate to $48.5 per barrel last month. While hedging oil is nothing new in Mexico as the country has been engaged in this practice since 2000, however, the amounts being used are record-breaking in nature.

With oil price rising and Brent crossing $60 per barrel area for the first time since June 2015, there is a high risk that in 2018 Mexico might lose money on its hedge. WTI is currently trading at $54.9 per barrel and Brent at $6.5 per barrel premium.

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