Mexico Dodged Oil-Price Rout After Big Banks Provided Hedges

Mexico disclosed the existence of its hedges in November, as falling oil prices stoked questions among investors and analysts on how the government would handle the prospect of shrinking revenue.
Mexico disclosed the existence of its hedges in November, as falling oil prices stoked questions among investors and analysts on how the government would handle the prospect of shrinking revenue.

By Isabella Cota, Eric Martin and Carlos M Rodriguez / Bloomberg

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among seven banks that made oil trades with Mexico that allowed the government to lock in higher prices as crude tumbled 49 percent last year.

The banks, which also include Citigroup Inc., Morgan Stanley, BNP Paribas, Barclays and HSBC Holdings, were the counterparties on oil trades the Mexican government made in 2014 to hedge prices for the coming year, the Bank of Mexico said in response to a public-information request by Bloomberg.

The government, which depends on oil for about a third of total revenue, had previously said it paid $773 million for the hedges through 43 operations in international derivatives markets.

So far, the bet is paying off: Mexico’s Maya crude-oil mix has averaged $49.42 since the end of November — well below the price of $76.40 a barrel guaranteed under the hedges. The seven banks would be on the hook to make up the price difference, according to the government.

With 228 million barrels of oil sales covered, the government’s hedges are currently worth about $6.45 billion, based on Maya prices observed since the beginning of December, and assuming that oil stays at its current level through November.

http://www.bloomberg.com/news/articles/2015-06-11/mexico-beat-oil-price-rout-as-bankers-took-other-side-of-hedge

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