Saturday, December 2, 2023

Hacienda Hedge: platinum lining to Mexico’s cloud

It has become a Rite of Spring. Each year Mexico rolls the dice and makes a huge options bet on the future direction of oil prices. It’s so predictable that it has its own nickname in financial circles — the “Hacienda Hedge” or the “Pemex Hedge.”

Basically Mexico bets heavily on crude oil’s price, using options to assure a price for future deliveries of Mexican, or “Maya” crude.

Wall Street holds its breath.

The Pemex Hedge answers the question, “What does Mexico, a major oil exporter, think is going to happen to oil prices?”

Like any private financial transaction, especially a massive one such as the Pemex Hedge, there are many unknown and potentially market disrupting details and few known details. Exact numbers of barrels hedged, the cost of arranging the private options to sell at a fixed future price,  and the months in which the future sales are price guaranteed are among the unknowns.

But a major “known” is the price.

This year Pemex, or more likely Mexico’s treasury, thought the future price would be an average US$49 a barrel, and publicly disclosed this vital detail.

If the “M” in Mexico stood for “matador,” it would be two ears, the tail, and the horns of the bull — a bravissimo performance. The aficionados would be on their feet, cheering and throwing hats and flowers into the bull ring. The public may never know if the hedges were sold, or closed out prior to expiration as oil process collapsed, but my estimate is that the Hacienda Hedge 2020 earned or saved Mexico US $6 billion, almost a Soros-sized coup.

Taking a reasonable percentage of Mexico’s exports, based on 2019 output, “normalizing” the West Texas Intermediate benchmark price at about $15 a barrel before the fluke of the lack-of storage-capacity price collapse this week, working from too meager publicly available figures, if every cloud has a silver lining, there was a welcome ray of sunshine through Mexico’s cloud, a platinum one instead of silver.

Carlisle Johnson is a journalist based in Guatemala.

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