Mexico expanding oil hedge as fuel prices float

Mexico buys put options from small group of investment banks each year

Mexico will most likely expand its oil hedge marginally for 2018 as it liberalises gasoline prices, while the cost for the government to protect crude exports against a drastic drop in prices will be about the same as for this year, Finance Minister Jose Antonio Meade said.

The earthquake off Mexico’s coast last week should trigger a portion of the World Bank’s largest catastrophe bond if the location in Chiapas and its magnitude of 8.1 is confirmed, Meade said in an interview with Bloomberg News. The World Bank issued in August the bond of as much as $360 million against losses from tropical cyclones and earthquakes in Mexico.

Mexico buys put options from a small group of investment banks each year in what’s considered Wall Street’s largest — and most secretive — annual oil hedge. The Finance Ministry said in its 2018 budget proposal to congress last week that a hedge strategy was employed to guarantee the average export price of $46 (Dh168.97) per barrel of crude, through both put options and a beefed-up Oil Revenue Stabilisation Fund, or FEIP.

“We’re far enough advanced so that we’re confident in saying that the $46 coverage and stabilisation fund have good support,” Meade said in the interview. Moving to a free-floating price of gasoline “played a role in looking at how much we will cover.”

The stabilisation fund and lower reliance on oil revenue will help keep the government’s price tag from rising as the programme expands, Meade said.

Nafta renegotiation

Talks to renegotiate the North American Free Trade Agreement (Nafta) with the US and Canada have been going well and the government’s expectations for the outcome haven’t changed because the discussions are evolving as predicted, Meade said.

All three parties said after meeting for a second round of talks earlier this month in Mexico that they’ll seek to finish talks by the end of the year.

Mexico’s economy is outpacing expectations from earlier this year, but several risks loom on the horizon, including Nafta renegotiations and the presidential election in 2018. Mexico has pushed to step up talks so that they don’t interfere with elections.