How Has Mexico Made $2 Billion from an Oil Hedge?

In a triumph that has sent shockwaves through the energy sector, Mexico is set to receive a US$2.5 billion payout on a sovereign oil hedge placed in 2020. The payout will mark the fourth time in the last two decades the Latin American country has escaped market turmoil and enjoyed significant hedging profits, with analysts saying it comes at a time when the country is in desperate need of cash.

The legendary “Hacienda Hedge”

For the past 20 years Mexico has guaranteed oil revenue via options contracts purchased from oil companies and Wall Street investment banks such as JPMorgan Chase & Co and Goldman Sachs Group Inc. It’s known as the “Hacienda Hedge” and is considered one of the most exclusive and lucrative annual oil deals in the world, with President Andres Manuel Lopez Obrador revealing it guaranteed the country a price of around US$49 a barrel for 2020.

“It’s the deal that all banks wait for each year,” says Richard Fullarton, former senior trader at Royal Dutch Shell. “It’s so large that it can make or break their year.”

Executed every spring, the deal offers a glimpse at Mexico’s outlook for the oil industry. As one of the biggest oil exporters in the world, the country produces around 1.7 million barrels of “Maya” crude per day, making the hedge a huge opportunity for international buyers.

Protecting Mexican markets

This price guarantee gave Mexico the freedom to revoke on OPEC+ production cut agreements and continue to produce and sell oil. It also protected the country from the chaos triggered by the coronavirus pandemic, which saw prices for Mexican oil plummet to just US$12 a barrel in April. Now, the country is profiting from this move and on track to enjoy a payout worth more than US$2 billion. “We protected the Ministry of Finance,” asserted President Andres Manuel Lopez Obrador in April.

It’s not the first time the hedging strategy has protected the national bank account, with the country enjoying a payout of more than US5 billion in 2009 during the global financial crisis. Despite the Saudi Arabian price war of 2016 Mexico was paid out US$$2.7 billion.

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