From Bloomberg

Mexico’s new government will probably continue hedging the country’s oil output in what is the world’s largest annual oil deal, according to an economic adviser to president-elect Andres Manuel Lopez Obrador.

The country’s annual sovereign oil hedge and that of Petroleos Mexicanos are “working fine” and probably won’t be changed, said Abel Hibert, a member of Lopez Obrador’s economic team, reiterating comments made in a May interview.

“The formula by which the government is calculating the price of oil is a very stable formula,” he said over the phone from Mexico City. “Using the hedges reduces uncertainty in financial markets.” Energy policy was discussed generally and the hedges were not mentioned at a late Tuesday meeting of the transition team, he said.

The annual sovereign oil hedge, the largest of its kind, is considered one of Wall Street’s most secretive oil deals. Historically, the finance ministry buys put options — contracts that give it the right to sell crude at a predetermined future price — from a small group of investment banks and oil firms. Separately, Pemex has started to hedge about a third of its production since last year.

Mexico has spent $1 billion on average in recent years on put options, making money at least three times on the hedge since it started to lock-in prices every year in 2001. That included a record payout of $6.4 billion in 2015 after oil prices crashed.

Lopez Obrador will take office Dec. 1 after winning presidential elections on Sunday.


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