Mexico Said to Lock In $60-$65 in Annual Oil Hedge

(Bloomberg) -- Mexico is in the process of locking in its income from next year’s oil production, people familiar with the matter said, in what’s one of the most closely watched deals among the world’s energy traders.

The country has been purchasing put options, which grant the right to sell at a predetermined price, at a price range of about $60 to $65 a barrel, the people said, asking not to be identified because the trade is private. 

The oil hedge, a multibillion-dollar deal which typically covers 200 million to 300 million barrels, is so large it often roils the market. 

Mexico’s Finance Ministry declined to comment. 

Mexico has taken unprecedented steps over the last two years to keep details the hedge secret as the government fears that any information surrounding the deal could allow traders to front-run it, increasing the cost.

Although Mexico first hedged its oil revenue during the first Gulf War, the country didn’t introduce the current annual program until a decade later. Since then, it has hedged every year, with the exception of 2003 and 2004, when it skipped the deal as oil prices were rising.

The deal has paid off several times since, including in 2009 -- after the global financial crisis sent oil prices sharply lower -- and again in 2015, when a record of more than $6 billion was gained, as well as in 2016. Last year, Mexico earned $2.38 billion from the hedge as oil prices crashed.

Since 2001, Mexico has spent $15.1 billion in fees buying put options, but has earned $16.5 billion thanks to the four times that the hedge came into the money, according to Bloomberg News estimates based on government data.

In the past, Mexico has bought the put options from some of the top names in Wall Street, including Goldman Sachs Group, Citigroup Inc., and JPMorgan & Chase Co., plus the in-house trading arms of big oil companies such as Royal Dutch Shell Plc. It’s unclear who the counterparts of the Mexico deal for 2022 are.

As oil prices rise to multi-year highs, other producers have also jumped on the opportunity to lock in future output. Malaysian oil and gas producer Petroliam Nasional Bhd, which hedged a portion of its output earlier this year, returned to the options market in the past few weeks and U.S. shale producer Hess Corp. boosted its volumes hedged too. 

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