21–25 of 25 posts
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.
Remember: producing oil costs Mexico. They can collect on the puts without producing oil.
If the oil prices drop below Mexico's production cost, whether it's useful for them to continue producing depends on the impact their have on world prices, and thus the payout for their puts.
Earlier quoted context omitted.
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.
Actually if it’s simply a put the profits on the hedge stand independently of what they actually produce. They could lift the hedge at any moment or take the opposite bet to offset it regardless of their actual production. It seems to me it would be more advantageous to lift part of the hedge at a profit and then produce less since the price is way under the cost of production.
Oh, and of course, this is all politics. They are not just maximizing profits, but they also have to worry about the optics of firing redundant workers, if they stop production.
The context is important. Right now, Mexico doesn't want to join OPEC+ production cuts because of their hedges (long puts).
The context is important. Right now, Mexico doesn't want to join OPEC+ production cuts because of their hedges (long puts).
Earlier quoted context omitted.
Pardon my ignorance but if they bought puts at $49, with the current price they must have made a killing right?
Yes an absolute killing, similar to the one mentioned in the article for back in 2008 - may not be as much as back then but still a lot. 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
It's just insurance so when the prices crash the country doesn't go with it. Since no insurance company in the world can insure even a small govt, the only way to go for it is with financial instruments.
We rather lose a bit of money during the good times and not get wiped during the bad times.
It also seems Hacienda is quite decent at reading the markets from the article, I didn't know as much.