Mexico spent $ 1.5 bn to hedge crude exports at $ 70/bbl

Nov 11, 2008 01:00 AM

Mexico's government has spent $ 1.5 bn on hedging to guarantee an average price of $ 70/barrel for its crude exports next year, Finance Secretary Agustin Carstens said, confirming rumours that had been swirling.
Confirmation of the hedging came as the Mexican Congress entered the final stages of its 2009 Budget debate. The crude export price is a key factor in this equation, as oil accounts for more than a third of the Mexican government's income.

In recent years, the budget has been based on a very conservative estimate of the likely oil price. To free up more money for spending, members of Congress have pressed, usually successfully, for the estimate to be raised. This time, however, the estimate was set at $ 80/bbl -- conservative when the sums were done -- before being reduced to $ 70/bbl, which is roughly equivalent to $ 82/bbl for WTI.
In a note published before the hedging was confirmed, Tom Lajous, a Mexico-based strategist for UBS investment bank, wrote: "Mexico's oil stabilization fund dropped by close to $ 1.5 bn in the third quarter of 2008, with a footnote in the Finance Ministry's report that reads that the monies were spent in financial investments as part of the measures taken for risk management..."

The oil stabilization fund is a "rainy day" resource in which the ministry stores away windfall oil earnings as insurance against a drop in prices. Carstens confirmed that it had been used for hedging.
This was "very good news," Lajous wrote. "A presumed cost of some $ 1.5 bn is immaterial relative to risks."

Assuming oil production and exports remains at current levels -- by no means certain after months of decline in both indicators -- the hedging would ensure Mexico of $ 35 bn in crude export earnings next year.
That should ensure the economy sees better than zero growth, current account problems are kept at bay and the peso marginally strengthens, Lajous wrote.

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