By Devika Krishna Kumar and Stefanie Eschenbacher
NEW YORK/MEXICO CITY (Reuters) – Mexico is wrapping up purchases for the 2021 version of an oil hedging program that insures its revenues from oil gross sales, sources accustomed to the legendarily opaque commerce stated, following a very difficult yr.
Negotiations to buy the majority of the monetary contracts that defend Mexico in opposition to oil worth crashes have now been concluded or are nearing conclusion, two sources with direct data of the matter and three market sources who comply with volumes and flows of such contracts carefully stated.
The Mexican finance ministry declined to remark.
The hedge is essential for Latin America’s second-largest economic system which is vulnerable to a credit standing downgrade. With oil costs beneath the hedged stage for many of this yr, it’s virtually actually set to provide a sizeable 2020 payout – a lifeline for a rustic in deep recession.
Nevertheless, distinctive market volatility has sophisticated the fragile negotiations with Wall Road banks and oil majors and elevated the value for the choices the nation is buying to guard 2021 oil export revenue.
“Volatility this yr was huge,” stated Raul Gonzalez, who labored within the Mexican finance ministry within the early months of the present administration and now lectures economics on the prestigious Tec de Monterrey college.
“The oil hedging program is important. It provides stability amid public finance and funds challenges. It is costly however has generated advantages, it prevents the nation dropping its funding grade ranking and ensures solvency,” he stated.
Regardless that the hedge would usually run from Dec. 1 this yr by Nov. 30 2021, and the amount of trades has been muted in current days, Mexico “may nonetheless have extra to hedge” for 2021, one market supply with data of the matter stated – citing decrease than common volumes to date this yr for trades according to the Mexican hedge.
One other doable clarification for the decrease volumes: Bankers and officers instructed Reuters earlier this yr they anticipated a smaller 2021 hedge as a result of elevated value of the choices Mexico has purchased up to now.
Mexico can proceed to barter trades and layer-in the hedge even after the Dec. 1 begin, the sources stated, although the nation would usually be accomplished by December.
Worldwide benchmark Brent crude oil has climbed above $50 a barrel, recovering from the lows touched earlier this yr, and will present Mexico with a chance to lock in some gross sales at larger worth ranges, the sources stated.
The extremely secretive trades are normally accomplished in tranches and canopy solely components of the yr, info regarding earlier oil hedging packages obtained by Reuters by a request beneath the nation’s Freedom of Info Act reveals.
Reuters spoke to a number of market sources who stated that placing the oil hedging program into place was particularly troublesome this yr.
The coronavirus pandemic and a quick worth battle between oil superpowers Russia and Saudi Arabia crushed oil costs in April and despatched choices volatility surging, making the contracts costlier than regular, the sources stated.
“It was extra fragile than the final yr contemplating the already loopy volatility and low costs,” one oil dealer stated. “They tried to cover it greater than common, however now there is no extra hiding. For certain, it is there.”
Mexico has in recent times shelled out greater than $1 billion yearly on this system, which is comprised of put choices on Maya and Brent and provides it the appropriate to promote the choices at a predetermined worth sooner or later.
Mexico additionally places apart part of a particular funds stabilization fund to prime up the choices program and canopy the value set out within the nation’s funds.
The negotiations have turn out to be more durable in recent times as banks shut their commodity buying and selling desks and the variety of counterparties has dwindled. So Mexico has additional restricted the knowledge it makes publicly out there for this system.
It neither disclosed the strike worth, the variety of barrels hedged, the general value of this system or the names of its counterparties for 2020.
The nation’s transparency regulator rejected repeated requests for documentation across the oil hedging program arguing that it might give Mexico’s counterparties a bonus and enhance the price of this system.
(Reporting by Devika Krishna Kumar in New York and Stefanie Eschenbacher in Mexico Metropolis; Enhancing by Frank Jack Daniel and Marguerita Choy)