US$1 Billion to Hedge Mexican Oil Exports in 2020

Mexico has managed to shield oil exports for 2020 by contracting an insurance product that, according to Gabriel Yorio, Deputy Minister of Finance and Public Credit, has meant a disbursement of around US$1 billion for the federal government. This product, normally used to protect public finances in the event of a sharp drop in oil prices, secures a price of US$49 per barrel. Arturo Herrera, Minister of Finance and Public Credit, said the insurance covers oil revenues from exports which represent about 4 percent of the national GDP.

The federal government’s disbursement coming from the Budgetary Income Stabilization Fund (FEIP) contrasts with that made in 2019, when Mexico paid US$1.2 billion to protect the price of the barrel at US$55. According to Yorio, the decrease in expenditure relates to the restructuring in the oil coverages themselves. Among other things, regulations for maritime transport, which prohibit the use of heavy fuel and directly affect PEMEX’s way of working, had to be updated.

Yorio did not want to specify the exact amount paid by the government nor the quantity of barrels insured to avoid giving clues to other oil markets. “We do not reveal expenses because if other markets see the price and try to buy the product at the same time, this could make the price more expensive,” he said, before announcing a production forecast of 1.13MMb/d for 2021 at an average price of US$49 per barrel.

Mexico began to invest in oil hedges in 2001 to protect its economy, which is highly dependent on oil production, in order to protect itself against the volatility of crude prices and exchange rates.