Amid OPEC Turmoil, Mexico Banks Over $2 Billion From Oil Hedge

As various members of the OPEC cartel argue (virtually) over extending production cuts, losing market share, and collapsing domestic sovereign revenues amid a pandemic-driven global economic slump, one oil-producing nation is doing very well on its own… again.

Having abandoned the OPEC+ production cut deal earlier in the year, Bloomberg reports that Mexico will cash in its oil price insurance policy this year for the fourth time only in the last two decades, receiving a payout of about $2.5 billion from its 2020 sovereign oil hedge, people familiar with the transaction said.

By way of background, Bloomberg’s Javier Blas, who has closely followed Mexico’s oil hedgers in the recent past previously wrote, for the last two decades, Mexico has bought “Asian” style put options from some of the most prominent US investment banks and oil companies, in what’s considered Wall Street’s largest – and most closely guarded – annual oil deal.

The options give Mexico the right to sell its oil at a predetermined price. They are the equivalent of an insurance policy: the country banks all gains from higher prices but enjoys the security of a minimum floor. So – unlike all of its OPEC peers – if oil prices remain weak or plunge even further, Mexico will still book higher prices.

Bloomberg notes that this year’s hedge expired earlier this week, as the program runs annually from Dec. 1 to Nov. 30, triggering the payment mechanism. The government hasn’t yet disclosed the amount, but it released some financial data earlier this year that allows analysts to make an approximate calculation.

“The insurance policy isn’t cheap,” Mexican Finance Minister Arturo Herrera told broadcaster Televisa earlier this year.

But it’s insurance for times like now. Our fiscal budget isn’t going to be hit.”

The hedge payout – which Bloomberg cites sources who prefer to be not named – will go a long way to covering the shortfall since Mexico’s oil basket price averaged $36.40/bbl from Dec 1st to Nov 30th, well below the budgeted $49/bbl level…

Mexico counterparts on the deal have included in the past banks such as Goldman Sachs Group Inc. and JPMorgan Chase & Co., as well as the in-house trading units of big oil companies like Royal Dutch Shell Plc and BP Plc.