Latin America Advisor

A Daily Publication of The Dialogue

Is the Oil Hedging Program a Good Deal for Mexico?

Mexican Finance Minister Arturo Herrera said the country’s oil hedging program will cost the government “around $1 billion.” For more than a decade, the government has paid for the hedge to guarantee revenues from oil exports. // File Photo: Mexican Government.

Mexico’s government hedged oil exports for 2020 at an average of $49 per barrel, the Finance Ministry announced this month, locking in protection against low crude prices in what is considered to be Wall Street’s largest oil deal. The ministry did not disclose the number of barrels that were hedged nor exactly how much Mexico paid. What does the hedging program mean for Mexico’s finances, as well as for state oil company Pemex? Is the hedge price, lower than last year’s $55 per barrel, a good deal for the country? What forces are driving global oil prices, and what is the outlook for oil prices in the coming year?

Jorge León, energy economist at BP: “Mexico’s hedging program has been characterized as the world’s largest financial oil deal. It is common practice for Mexico to hedge and, in fact, Mexico earned billions of dollars from the hedge in 2009, 2015 and 2016 after oil prices dropped significantly, locking in above-market prices. The interesting aspect of this year’s hedging is the price at which the program was locked. There are several factors in the oil market this year that point toward upward price pressure. From the supply point of view, in 2020 it is expected that non-OPEC supply will grow by more than two million barrels per day (bpd). However, U.S. tight oil is facing headwinds due to investor pressure, and it could underperform. Easing of trade tensions, in line with the recent ‘phase one’ deal between United States and China, and global economic recovery would further support oil demand growth. Moreover, increasing geopolitical risk in the Middle East could arguably add a premium to oil prices in 2020. But, more importantly, in the last three years, the OPEC+ countries have…”

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