Mexico has made the first moves to launch its annual $1 billion oil hedging programme by asking banks for quotes, sources familiar with the deal said, while buying in financial oil options contracts for 2020 has risen in recent days, consistent with the giant trade.
A Wall Street source and a Mexican congressional source familiar with the program, both of whom declined to be identified because of the sensitive nature of the deal, told Reuters on Wednesday that banks have been submitting offers for the hedge and that Mexico had requested these quotes.
For more than a decade, Mexico's government has paid for a hedge in a bid to guarantee its revenues for the coming year from oil exports by state oil company Pemex. The series of highly anticipated oil trades is seen as the world's top sovereign derivatives trade.
Mexico's 2019 sales were hedged last year at an average price of $55 per barrel in a deal worth $1.23 billion on put options. Pemex separately hedges its own sales, resuming the practice in 2017 for the first time in 11 years. The Mexican finance ministry did not immediately respond to a request for comment.
Negotiations are notoriously secretive and limited to few participants as both sides attempt to secure the best terms in a highly competitive deal for banks. It is unclear when Wall Street banks started to submit bids to Mexico. Reuters reported last week that Mexico was close to executing the hedging program after several sources familiar with the program said that talks between Wall Street banks and the finance ministry had intensified recently.
"They are in the final stages of the hedge," the Mexican source said of the negotiations, ahead of the country presenting its 2020 budget on Sunday. Mexico garners a large part of its public revenues from selling Maya crude oil and therefore aims to protect those sales with put options that grant it the possibility to sell oil at a certain price at the future.
It is not clear how many put options Mexico bought, from whom, and at what price, to hedge its 2020 oil revenues because the deal is usually done over several months to secure the best price. Market sources on Wednesday pointed to increased buying in specific contracts expiring in June 2020 and the second half of 2020 for both US West Texas Intermediate crude (WTI) and Brent crude, as well as so-called fences, a strategy that involves using three options contracts to protect against oil prices falling, but also makes it possible to profit from price increases.
While the fences saw limited trade volumes, brokers also saw increased buying in volatility in anticipation of market gyrations as Mexico gets into the market. In the past, Mexico discreetly requested quotes for these put options from about a handful of Wall Street banks and oil majors starting in late spring; documents related to some past deals show it then bought them in as many as 50 separate transactions between May and August.
Maya heavy crude, the country's primary oil for export, has unusually traded at a premium to benchmark US crude for the last eight months. Trading has been more volatile following US President Donald Trump's trade war with China and Mexico. This made calculating the formula for the hedge more difficult because it is harder for parties to agree on a reasonable per-barrel price for 2020.
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