US$2.5 Billion Payout: Hacienda Hedge Shows Its Worth Again

Mexico will reportedly receive approximately US$2.5 billion in payouts this year, as its famously expensive sovereign oil hedge once again proves value for money. Just days after news broke that PEMEX is about to begin the process of contracting its own oil hedge to cover the company in 2021, Bloomberg today reported that “people familiar with the transaction” have said that Mexico is due for a multi-billion-dollar windfall.

The sovereign oil hedge, often referred to as the Hacienda Hedge, is so important to the country that it is considered a state secret. The hedge is considered the largest of its kind but due to the secrecy that surrounds it each year, definite figures on cost and value are uncertain. Usually, the cost of the hedge is around US$1 billion, according to Reuters.

The 2020 hedge was reported to have guaranteed Mexican exports a price of US$49 per barrel during a year in which oil futures plummeted into negative pricing for the first time in history. As a consequence, other oil producing countries were said to be considering following Mexico’s lead, MBN reported. While prices have improved since April, they have yet to recover their pre-pandemic values and look unlikely to do so as COVID-19 concerns exacerbate oil demand woes. 

Since 2001, the country has received around US$14 billion from its hedge. Due to this year’s turbulence, the payout was expected to be large and in April, President Andrés Manuel López Obrador said the country could receive US$6 billion if prices kept their downward spiral. While the payout will not be so high, it will certainly help tend the wounds from a brutal year for Mexico’s NOC PEMEX, which reported consecutive quarterly losses in 1H20 including a historic US$23 billion loss in 1Q20.

On Thursday, OPEC+ will meet to decide production figures for the next phase of its 9.7MMb/d reduction plan that was signed this year. The production agreement will influence global production for 2021 and hopes to stabilize prices before a COVID-19 vaccine can be delivered.

According to PEMEX figures, the Mexico oil basket has averaged a price of US$34.22 per barrel compared to US$55.63 per barrel in 2019. As of 10.50 CST Dec. 1, its price stood at US$42.92. Though the cost of the Hacienda Hedge is expected to rise in 2021, the uncertainty in oil’s future will likely see the government opt to insure its valuable export once again.