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Mexico’s Hedging Program Shields Country from Crude Price Rout

Amy Stillman

(Bloomberg) -- Mexico’s finance minister said the country’s oil income is completely covered by its sovereign oil hedge.

The timing couldn’t be better for the Latin American producer amid the biggest plunge in oil prices in almost three decades as Saudi Arabia and Russia vowed to pump more oil in a battle for market share.

Mexico’s oil income is 100% covered by hedges, Finance Minister Arturo Herrera said in an interview on W Radio on Tuesday, noting that he was more concerned about the spread of the coronavirus than the price rout.

The so-called Hacienda hedge is the world’s largest sovereign oil hedge. Mexico has spent an average of almost $1 billion a year over the past decade buying put options through deals with banks that have included Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, BNP Paribas SA, Barclays Plc and HSBC Holdings Plc.

More than 80% of Mexico’s oil production has a break-even cost higher than $35 a barrel, making it the Latin American producer that’s most exposed to the crude crash, according to a research note from energy consultancy Wood Mackenzie Ltd.

Historical Boons

The oil hedge has in the past typically covered between 200 million and 300 million barrels. Last year the country’s oil exports were just over 400 million barrels.

This year, Mexico paid $1 billion to protect its 2020 oil exports at an average of $49 a barrel.

Mexico earned $6.4 billion from hedging in 2015 after West Texas Intermediate oil futures fell from an average of $53.27 a barrel in 2014 to $37.04 in 2015.

Last month, Herrera said in an interview that the oil hedge will continue next year, but that Mexico needs to keep details of the trade private in order to prevent the market from front-running the transaction.

Petroleos Mexicanos has its own hedge separate from the Finance Ministry’s that typically protects about one-third of its production from pricing volatility. Pemex’s bonds plunged to a record low on Tuesday amid global volatility.

--With assistance from Cyntia Barrera Diaz.

To contact the reporter on this story: Amy Stillman in Mexico City at astillman7@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Mike Jeffers, Catherine Traywick

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