Mexico Spends $1.2 Billion to Lock in Crude Rally for 2019

(Bloomberg) -- Mexico spent about 23.5 billion pesos ($1.2 billion) through the third quarter from its budget stabilization fund, which historically has been used almost exclusively to hedge forward oil prices, according to a quarterly report.

The hedges, often known as Wall Street’s largest oil trade, are kept private to prevent hedge funds and trading houses from front-running the Mexican government’s orders. The document doesn’t detail how much crude was hedged. The government may be close to finished with purchasing the hedges to cover next year’s exports, assuming costs remained about the same as last year, when it spent 24.1 billion pesos.

The report suggests that most of the hedging so far for 2019 was done from April through June; a previous report showed Mexico spent 13.8 billion pesos for the same purpose during the first half of the year, meaning that it spent 9.6 billion pesos on puts in the third quarter. While that may have allowed Mexico to lock in prices as the nation’s oil mix rallied 22 percent in the second quarter, the government might have been better off waiting, given that prices climbed another 13 percent to an almost four-year high of $77.73 a barrel earlier this month.

Read more: Mexico Is Said to Take First Steps in Annual Oil Hedging Program

The government can typically hedge at a lower cost when oil prices are higher, given that higher prices can make the banks it works with feel more comfortable that the market will continue to rise and the nation will be less likely to collect on the puts, which act like a kind of insurance against a drop in prices. Mexico has received handsome payouts from the program, earning a record $6.4 billion in 2015 after the Organization of Petroleum Exporting Countries embarked on a war for market share that sent prices tumbling. The country made $5 billion in 2009, after the global financial crisis, and another $2.7 billion in 2016.

Bloomberg News reported in May that Mexico had been asking counter-parties for quotes to hedge crude exports.

The team of incoming President Andres Manuel Lopez Obrador has said the oil hedging program by the Finance Ministry and the state-owned oil company known as Pemex, will continue during his administration.

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