Mexico is close to executing its annual oil hedging program on Wall Street, three people familiar with the matter said this week, after oil price volatility and a coming change to marine fuel regulations slowed the process.
Mexico has spent more than $1 billion on financial contracts in past years to protect revenue from oil sales against price volatility. The deal is highly anticipated and participation can make or break an investment bank’s deal book.
Two investment sources and a Mexican government official, all of whom declined to be identified because of the sensitive nature of the deal, told Reuters that talks between banks and Finance Ministry officials had intensified recently. Hedge transactions could be executed beginning next week, one said.
Mexico’s Finance Ministry did not immediately respond to a request for comment.
It was not clear what oil price Mexico was targeting for the options contracts, and some Wall Street sources cautioned that the deal could still face delays.
Talks between ministry officials and bankers had started earlier this year, and Mexico a month ago adjusted a key part of the formula used as the basis for its oil hedges.
One Wall Street source said on Thursday that some firms vying for the deal had been given the new price formula.
This year’s unusual challenges had prompted speculation about whether the deal would happen at all. But the government official said it would be too risky for the country not to hedge.
“The revenues from oil sales remain very important for Mexico,” the official said, adding that oil contributed about 20% of the country’s budget. “We cannot get to a point where we do not have the necessary protection of the oil hedge.”
Mexico aims to discreetly secure the best price for put options that grant the holder the right to sell oil at a fixed price in the future. In the past, it has bought the options from a handful of Wall Street banks and oil majors between May and August, documents related to previous deals show.
Unusual price volatility in Maya heavy crude, the country’s flagship oil export, was one of two complications in talks to set a formula for this year’s deal. Maya traded at a premium to U.S. crude for much of this year as demand rose following U.S. sanctions on Venezuela and President Donald Trump’s trade wars with China and Mexico.
The formula also was affected by an International Maritime Organization mandate that requires beginning Jan. 1 that ocean-going vessels without emissions scrubbers use low-sulfur fuels to cut air pollution.
Firms interested in selling the put options had requested Mexico revise or remove a component pegged to high-sulfur fuel oil prices. Those prices had made up about 40% of the past formulas.
The government’s 2019 oil sales were hedged at an average price of $55 per barrel in a deal worth $1.23 billion. State oil company Pemex separately hedges its own sales, resuming the practice in 2017 for the first time in 11 years.
The Mazatlan Post