The Strategist

Mexico bets $ 1.25 billion on falling oil prices

11/01/2017 - 11:34

Mexico spent $ 1.25 billion to protect itself in case oil prices fall in the next year. Was it worth spending such amount of money?

Mexico is, in fact, the only major oil-producing country that regularly hedges the price of its supplies. Every summer, Mexico buys options "put", which can be executed in the period from December of the same year to the end of November next. If the price of "black gold" goes down, then the options are profitable.

This time, the Mexican Ministry of Finance decided to hedge against quotes falling below $ 50 per barrel, for which it bought a huge number of put options, Bloomberg writes with reference to the data of the country's finance ministry.

It is worth noting that Mexico is hedging just when the mood of players in the oil market are in a state close to euphoria. Their net long position in the five main contracts (Brent, WTI, RBOB, HO) is now a record 1.189 billion barrels.

Last year, Mexico spent $ 1.03 billion on hedging. On average, the country's Ministry of Finance spent about $ 1 billion for these purposes last year. Such an operation was first carried out in 2001, then the hedge volume was only $ 217 million.

In 2003 and 2004, when oil prices rose, the country preferred not to insure against falling altogether, but in 2005 the strategy came out on a regular basis. By the way, hedging brought Mexico $ 5.1 billion in 2009.

Mexico occupies the tenth place in the world in terms of production, and oil is an extremely important income item for the country. At the same time, against the background of falling oil prices, the country had to reconsider its policy and diversify the economy. It can be said that the authorities partially coped with this task. For example, according to the results of 2015, tax revenues not related to the energy sector increased by 28%.

Mexico expects that investments in the implementation of reforms in the country's energy sector will reach more than $ 80 billion, as stated by Mexican Energy Minister Pedro JoaquĆ­n Coldwell.

According to him, the number of contracts in the energy sector has already reached 199 with the participation of 125 companies.

$ 59.5 billion will be allocated for exploration and production, $ 2 billion - for seismic safety, $ 12.2 billion will go for construction of gas pipelines and $ 6.6 billion - for clean electricity, Coldwell said.

The Minister also noted that Mexico plans to receive 35% of the energy from "clean" sources by 2024. Primarily, this concerns the energy of the sun and wind.

Mexico has been reforming its energy sector since 2013. This time, private investment will be allowed in the sector for the first time ever.