Mexico ‘Hedges’ for Higher Guarantee on Oil : Energy: The strategy secured a more favorable price on crude than it normally receives. Other oil-producing countries are expected to follow suit.
Mexico has locked in much of its budgeted oil income for the next six months and picked up an additional profit of at least $125 million by selling 100 million barrels of oil through apparently unprecedented trades on New York financial markets, according to Wall Street and Mexican government sources.
The trades in December and January, which took advantage of higher oil prices at the time, guaranteed that Mexico would receive $17 a barrel for low-quality oil that is now trading for much less. That will help the financially troubled Mexican government meet its budgetary projections, which are based on $17-a-barrel oil. Mexico gets about 35% of its government revenue from oil.
“We have to keep our economic program intact. That’s the point,” a senior official in the Mexican government said. “It’s an interesting use of certain tools that are there.”
“This is something that worked. It was a great trade,” a well-placed Wall Street source said. “It’s just the type of hedging that a producing government should be doing.” Hedging is a form of trading that gives a buyer or seller insurance against future price fluctuations.
Many analysts say they expect other oil-producing nations, including members of OPEC, to adopt a similar strategy in the next few years. Sources said the Mexicans are already considering more such arrangements. “They’re getting very market-sophisticated,” the Wall Street source said. “This is not a one-shot deal.”
By using commodities trading to fix prices months in advance, the experts say, producing nations could effectively set a floor for oil prices for the world.
“This will have a very arresting effect on senior management at other major oil countries,” said Daniel Yergin, president of Cambridge Energy Research Associates Inc. in Boston. “Instead of doing what they’ve done in the past, which is assuming an oil price and plugging it into your budget, what (the Mexicans) have done is gone much further than that. . . . Up until now, they’ve always struggled with what assumption to use in their budget on price. Now they don’t have to do that.”
Mexico executed the series of complicated transactions when oil prices were several dollars a barrel higher than they are now because of the Persian Gulf conflict.
Mexico received what now appears to be a favorable price because some purchasers believed at that time that oil prices would rise once war broke out in the Persian Gulf. If oil prices do rise substantially before the delivery date, Mexico will have forfeited some opportunity to reap an additional windfall. A source said the Mexicans had set up the deal to allow them to profit from a price increase as well.
Because Mexican crude oil is generally of low quality, its value is about $4 less than the world market price for benchmark high-quality crude. At current market levels, Mexican crude is worth an average of $15.76.
With the $17 guaranteed price, Mexico stands to collect an extra $1.24 a barrel when its oil is delivered.
The Mexican arrangement covers more than 100 million barrels of oil, providing a potential profit of at least $125 million at current prices--beyond the profit Mexico makes anyway from crude oil sales.
The Mexicans used the oil futures trading system that has sprung up in recent years involving the New York Mercantile Exchange and the complex related financial instruments offered by brokerages and banks to oil buyers and sellers.
Mexico produces 2.6 million barrels, or about 5% of the world supply, of crude a day.