Wealthy Nations Daily Update - Mexico

It is reported that Mexico has won “trade of the year” and is set to receive over $6 billion for its oil hedges put on in 2014.

The government paid out $773 million in 2014 to lock in prices almost $30 a barrel higher than the average market price over the last year through a series of deals with banks including Goldman Sachs Group Inc., JPMorgan Chase & Co and Citigroup Inc.

The hedge which runs from 1st December 2014 to 30th November 2015 covers 228 million barrels at a price of $76.40 for the Mexican oil basket, according to government statements. This works out as a payment due of around $6.8 billion before fees as the basket has averaged $46.61 a barrel over the period and fell to a low of $33.28 on November 18th, a low since December 2008.

The IMF calculates the pay-out at $6.4 billion in a report on the Mexican economy dated 17th November and of course there is still a week for the agreements to run. To put this hedge in perspective, Glencore, the world’s biggest energy trader is expected to release earnings of around $2.6 billion before interest and taxes from its trading unit.

Mexico has already put in place its 2016 hedge; this was traded in August instead of November in an effort to lock in higher prices Luis Videgaray, Mexico’s finance minister reported.

Not many other countries are thought to hedge as Mexico does; Ecuador tried in 1993 but this caused a political storm and a $20 million loss, Colombia, Algeria and even Texas have used hedging in the past but few are thought to have current positions. Recently, oil importing countries such as Morocco and Jamaica are reported to have hedged against rising energy prices which could also be painful depending where they hedged.

One of the big commodity hedgers is in fact Ghana, who as the second largest exporter of cocoa, and hedges its prices forward of delivery. Indeed earlier in the year there was a panic as Ghana’s crop was reportedly going to disappoint to the tune of 22%, which Ghana had sold forward to lock in prices. During the middle of the year the Cocoa futures contract moved from 2,841 in early May to 3,353 mid-July as fears for non-delivery by Ghana pushed prices up. Open interest in the futures contract had been growing as some speculated that Ghana would have to come to market buying in the physical market to cover their outstanding contracts. These concerns proved to be unfounded as Ghana reported a marginal surplus in its 2015/16 crop but does go to show what a risky world commodity hedgers are involved in.

So well done Mexico. Bien hecho México.