Mexico opens door to going naked on oil hedge

By Nacha Cattan on 8/22/2019

MEXICO CITY (Bloomberg) - Mexico is evaluating locking in oil prices for next year and will inform the public “if we do it,” said Deputy Finance Minister Gabriel Yorio, who appeared to leave the door open to refraining from carrying out the world’s largest oil hedge.

Mexico usually buys put options from a small group of investment banks, starting as early as May, in what’s considered one of Wall Street’s largest -- and most secretive -- annual oil deals.

This year, the country decided to change the hedging formula to reflect incoming regulations on fuel oil, and in July said it had concluded that process. Since then, it hasn’t stated whether it’s begun the hedge or not.

“We’re evaluating it. And if we succeed at doing it, or if we do it, we’ll communicate that at the end,” Yorio told reporters after he was confirmed as deputy minister by lawmakers Tuesday. Asked if Mexico has had difficulties with the hedge this year, he said that “it’s a markets issue that I can’t discuss right now.”

His conditional phrasing is a departure from past ministry officials, who usually communicate their desire to do so, especially this late in the year. It even represents a shift from then Finance Minister Carlos Urzua, who told Bloomberg in January that Mexico planned to hedge for 2020.

In 2018, the hedge had already begun by mid-year, in 2017 Mexico took its first steps to do so in June, and in 2016 it began in June. Prior to that, the usual hedging period had been late August to late September.

Mexico has spent around $1 billion annually in recent years to hedge against fluctuations in prices to prevent an impact on government revenue. It has made money at least three times since buying put options almost every year starting in 2001. That included a record payout of $6.4 billion in 2015 after oil prices crashed.

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