mexico hedges its oil exports

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    November 10 2008

    Mexico is taking steps to protect itself from the oil price remaining below $70 a barrel in the clearest sign yet of the concerns of producer countries at the impact of the global economic slowdown on their revenues.

    The world’s sixth biggest oil producer hedged almost all of next year’s oil exports at prices ranging from $70 to $100 at a cost of about $1.5bn (£961m) through derivatives contracts, according to bankers familiar with the deal.

    The cover is far higher than the country – which relies on oil for up to 40 per cent of government revenue – usually seeks. Last year, Mexico hedged 20-30 per cent of its exports.

    Mexico’s finance ministry declined to comment on Monday but said in its latest quarterly report that its oil income stabilisation fund spent about $1.5bn on "financial investments, as part of the measures taken for risk management".

    Oil prices hit an all-time high of $147.27 a barrel in July but have since fallen to less than $65 as the global economy cools. In late afternoon trading in London on Monday, oil fell 18 cents to $60.86 a barrel.

    Tomas Lajous, a strategist at UBS in Mexico City, said the trades appeared to have occurred in late August and early September. "The hedge is very good news . . . a presumed cost of some $1.5bn is immaterial relative to risks," he said.

    Signs that a big producer was hedging emerged over the summer as traders in New York noted a significant surge in options for December 2009. Mexico’s programme could have added some downward pressure to spot oil prices as banks involved in the deal – Barclays Capital and Goldman Sachs – offloaded some of their risk, selling futures, traders said. Neither bank would comment.

    Without the hedge, the recent price falls would have been a serious concern for Mexico. The government has already revised its budget, lowering its oil price target from $80 to $70.

    Last month, Agustín Carstens, Mexico’s finance minister, told the Financial Times in an interview that he had been stunned by the fall in oil prices. "What we have seen is amazing," he said.

    However, he pointed out that the government’s stabilisation fund had a $10bn cushion. "We should be in good shape."

    Fitch, the ratings agency, cut the outlook on Monday on Mexico’s sovereign debt from stable to negative. Among the reasons, it cited were lower oil prices.

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