The world’s biggest oil hedging program is underway. Major oil producer Mexico has asked leading global investment banks to submit quotes for its sources.
Premiums on crude oil options surged this week ahead of the megadeal.
Usually, every year, Mexico purchases as much as $1 billion in oil derivatives, the world’s largest oil hedge program, to protect its oil revenues form market volatility, according to Reuters.
Quick fact: Hedging can be defined as a way of protecting one’s self against financial losses or adverse circumstances. It is also an investment intended to reduce the risk of adverse price movements in an asset. Crude oil producers can, therefore, hedge against crashes in oil prices by taking a position in the crude oil futures market.
Recall, a few months ago, Nairametrics explained how profitable these programs have been. Even though the hedge comes at a $1 billion annual cost to buy the option, it has shielded Mexico from market shock over the last 20 years, helping it to make $5.1 billion when prices crashed in 2009 during the global financial crisis, $6.4 billion in 2015, and another $2.7 billion in 2016 after Saudi Arabia’s price war.
Having the hedge in place has protected Mexico from the plunge. “The 2020 hedge, arranged in 2019, was completed at $49 a barrel,” according to the country’s finance ministry, and Mexican President Andres Manuel Lopez Obrador said in April that the hedge would yield roughly 150 billion pesos ($6 billion).
Negotiations of this megadeal are usually secretive as limited participants on both sides attempt to secure the best deal in a highly competitive deal for investment banks.
Mexico is expected to pay more for these oil derivatives because volatility in the crude oil is higher this year, for less coverage for the insurance policy for 2021. However, it is expected to go ahead to avoid ruining its financial standing among global financial investors, private sources have said.