Unique: Mexico strikes to launch world’s largest oil hedge

By Devika Krishna Kumar and Stefanie Eschenbacher

NEW YORK/MEXICO CITY (Reuters) – Mexico has requested high Wall Road banks to submit quotes for its large oil hedging program, sources acquainted with the matter mentioned on Friday, whereas buying and selling in crude oil choices has elevated this week forward of the megadeal.

The finance ministry has requested banks for value quotes, one supply with direct information of the matter mentioned, signaling the start of the method to execute the hedge. The ministry was not instantly obtainable for remark.

Yearly, Mexico buys as a lot as $1 billion in monetary contracts, the world’s largest oil hedge program, to guard its oil revenues. Bankers and officers on each side of the deal count on a smaller hedge this yr as a result of the choices used to guard oil earnings are dearer than final yr.

The oil market crashed earlier this yr, with the U.S. crude benchmark falling to negative-$40 a barrel in April. It was buying and selling round $43 on Friday.

Having the hedge in place protected Mexico from the plunge. The 2020 hedge, organized in 2019, was accomplished at $49 a barrel, in keeping with the nation’s finance ministry, and Mexican President Andres Manuel Lopez Obrador mentioned in April that the hedge would yield roughly 150 billion pesos ($6 billion). [nL2N2CA1M7]

As a result of volatility is larger this yr, Mexico is predicted to pay extra for much less protection for the insurance coverage coverage for 2021. Nonetheless, it’s anticipated to go forward to keep away from additional damaging its monetary standing with worldwide buyers, sources have mentioned. The nation’s credit standing has been lower in current months and is at risk of further declines. [nL1N2DP1P8]

Commerce retailers and banks primarily based in Europe and the USA have been lively consumers of implied volatility choices this week, market sources mentioned. That may be a sign that sellers are making ready for the in depth shopping for that comes with the finance ministry’s purchases, these sources mentioned.

Negotiations are very secretive and restricted to few members as each side try and safe the very best phrases in a extremely aggressive deal for banks.

For the 2020 hedge, sources estimated two-thirds of the choices Mexico purchased have been listed to the worldwide Brent crude benchmark, shifting away from the Maya oil Mexico primarily produces.

Common Brent crude costs for 2021 are presently at about $46 a barrel, their highest since early March.

(Writing By David Gaffen; Enhancing by Marguerita Choy)

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