Mexico’s billion-dollar oil hedge to protect next year’s revenues against oil price volatility will soon be made official, a finance ministry official said on Friday, according to Reuters, kicking off another year of trying to guess where oil prices are headed in 2020.
The oil market is a volatile one, but Mexico’s track record for profiting from its Hacienda hedge is thought to be better than most. Under this hedging program, Mexico buys put options from Wall Street investment banks to sell hundreds of millions of barrels of oil. With these put options, Mexico is granted the right—but not the obligation—to sell its oil at a predetermined price for the upcoming year.
Last year, Mexico spent $1.23 billion to protect its 2019 revenues, locking in a fixed price of $55 per barrel. In 2015 and 2016 when oil prices tanked, Mexico did well, profiting billions of dollars from oil sales that it would otherwise not have received by negotiating up front pricing that turned out to be significantly higher than the actual market price. Mexico keeps the details of its oil hedge a complete mystery, maximizing its leverage in order to maximize these profits.
The investment banks that get a piece of the action likely do a lot of handwringing in breathless anticipation of a deal with such an enormous scale. These investment banks have included the likes of Citi, JPMorgan, and Goldman Sachs, and in more recent years, Shell and BP have participated in the hedge too, in a chess game that pits Mexico against Big Oil to see who will come out on top.
The deals—made across multiple investment banks—are large enough that a wrong play can eat away a sizable portion of even the biggest of bottom lines.