World’s biggest oil hedge could shrink if Mexico curbs exports

Each year, Mexico participates in one of the biggest and most secretive deals in the oil market, locking in the prices of its net exports. The trade effectively makes the Mexican Ministry of Finance one of the largest sellers of oil contracts for 12 months.

But last week, state oil firm Petrolos Mexicanos said it would cut exports by more than half in 2022 and halt them all at once next year. Even if plans for self-sustaining fuel production fail, a campaign to reduce exports would mean a short hedge going forward. This in turn would reduce the amount of oil derivatives sold by Mexico in the coming years.

“If this turns out to be true it would remove one of the biggest sellers of back-end crude oil,” said Thibaut Remoundos, founder of Commodity Trading Corporation. On balance, this will speed up the move. Long-term crude oil prices, he said.

Producers such as Mexico act as a natural cap to prices in the months following the futures curve because they are sellers and seek to lock in insurance in the event of a drop in oil prices. Traders and analysts said that without it, the futures curve could be susceptible to price bounce.

Mexico’s export target is ambitious. The Latin American country lacks the processing capacity to convert its crude oil into refined products, meaning a complete cessation of exports would be a big surprise. However, crude oil production has dropped substantially over the past five years, suggesting that a small amount of exports will need to be hedged.

Traders and dealers said that if the hedge closes completely, it will have a significant impact on the options market. For example, buying a put option — which gives the holder the right to sell at a pre-determined price and time — is a popular method for producers, including Mexico, to hedge output. This usually makes puts more valuable than bullish call options. But Mexico’s absence could shake the market and make those puts less valuable.

Mexico’s finance ministry was hedging a price range of about $60 to $65 a barrel for 2022 as of early November, people familiar with the matter said at the time. Pemex has a separate, short hedge and oil options data that suggests the company was active recently.

The finance ministry did not immediately respond to a request for comment on this story.

In the past, the finance ministry’s hedge has been highly profitable. The ministry earned $2.38 billion in 2020, the year oil prices fell, and exceeded $6 billion in 2016. The oil market is also likely to be rocked when prices drop sharply, such as during the $10 drop in November last year.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.