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How interesting, I was just reading that same article yesterday! The article is from 2017, but Mexico has been doing the same trades still every year - for example: https://www.worldoil.com/news/2020/1/3/mexico-hedges-2020-cr... This is from this January 2020 - they hedged at $49 per barrel... just before the coronavirus demand shock and oil price fall... another great Hacienda hedge.
How interesting, I was just reading that same article yesterday! The article is from 2017, but Mexico has been doing the same trades still every year - for example: https://www.worldoil.com/news/2020/1/3/mexico-hedges-2020-cr... This is from this January 2020 - they hedged at $49 per barrel... just before the coronavirus demand shock and oil price fall... another great Hacienda hedge.
Pardon my ignorance but if they bought puts at $49, with the current price they must have made a killing right?
This is a case where a hedge plays out well, and the main motive for their play is stability for their government spending. Good for the citizens of Mexico
How interesting, I was just reading that same article yesterday! The article is from 2017, but Mexico has been doing the same trades still every year - for example: https://www.worldoil.com/news/2020/1/3/mexico-hedges-2020-cr... This is from this January 2020 - they hedged at $49 per barrel... just before the coronavirus demand shock and oil price fall... another great Hacienda hedge.
Pardon my ignorance but if they bought puts at $49, with the current price they must have made a killing right?
Earlier quoted context omitted.
Yep but probably more relevant than ever as Mexico still hedges most of it's production. That's why they have been able to hold out against the rest of OPEC+ on production cuts. They are basically guaranteed to get a much better price for their oil so cutting production probably doesn't make sense for them. So that hedge is really giving Mexico an outsized influence on global oil right now
You (and others, I know you're not alone) take a tone ("outsized") as if this is a distortion or problem that somehow needs to be fixed. The people who hedge, were doing so because they need time to adjust their supply to demand. This is a fact of reality, and hedging is the tool that allows producers to purchase insurance against sudden changes they couldn't otherwise deal with. Mexico or whoever, paid for their hed…
Earlier quoted context omitted.
Yep but probably more relevant than ever as Mexico still hedges most of it's production. That's why they have been able to hold out against the rest of OPEC+ on production cuts. They are basically guaranteed to get a much better price for their oil so cutting production probably doesn't make sense for them. So that hedge is really giving Mexico an outsized influence on global oil right now
You (and others, I know you're not alone) take a tone ("outsized") as if this is a distortion or problem that somehow needs to be fixed. The people who hedge, were doing so because they need time to adjust their supply to demand. This is a fact of reality, and hedging is the tool that allows producers to purchase insurance against sudden changes they couldn't otherwise deal with. Mexico or whoever, paid for their hed…
Also, It doesn't matter if their hedge costs as much as what it earns them over the years, the advantage they have right now is still real. And while yes, hedging is a common form of insurance in the oil industry, I don't know of any other oil producing state that hedges so much of their production.
So what I meant in my comment is that the revenue stability they have right now but other oil producers don't gives them an outsized negotiating power versus a country like for example Angola, that really cannot afford to not cut production if the Saudis demand it.
Earlier quoted context omitted.
Yep but probably more relevant than ever as Mexico still hedges most of it's production. That's why they have been able to hold out against the rest of OPEC+ on production cuts. They are basically guaranteed to get a much better price for their oil so cutting production probably doesn't make sense for them. So that hedge is really giving Mexico an outsized influence on global oil right now
You (and others, I know you're not alone) take a tone ("outsized") as if this is a distortion or problem that somehow needs to be fixed. The people who hedge, were doing so because they need time to adjust their supply to demand. This is a fact of reality, and hedging is the tool that allows producers to purchase insurance against sudden changes they couldn't otherwise deal with. Mexico or whoever, paid for their hed…
Would be useful to know the long term profitability of this annual hedge rather than cherry picking a great year. If, hypothetically, every other year they lost a billion, then this $5B gain doesn't seem as great.
It's not just about profitability, but insurance. It allows you to distribute the losses over a much longer period of time and fix them in your budget.
2017
Mexico hedged at $49 this year for about 234,000 bpd, extremely relevant. Lots of incentives (about $6bn) to both have oversupply and not cut production.