Mexico Hedges Oil Revenues in 2012, Uses Put Options
Mexico is a country that is economically dependent on its petroleum industry. Revenue volatility from one budget to the next, as business cycles tend to coincide with oil cycles, and the proficient use of oil revenues increases remain significant challenges for Mexico. Also, Mexico must deal with the scenario of decreased oil revenues as production is in steady decline and proven reserves are shrinking. The Government of Mexico has purchased put options at the US$ 85 a barrel level. This is to protect Mexico’s finances in case of a potential drop in the average price. The put options may be exercised in the event Mexico’s basket of export crude treads below an average of US$ 85 a barrel. This is nothing new as comparable hedging strategies have been used in the past to protect against oil price volatility.
The oil coverage program is applied through Mexico’s Oil Revenues Stabilization Fund.
In 2010, the Government of Mexico hedged at US$ 57 a barrel at a cost of over US$ 1 billion. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]