Mexico guarantees oil price for next year

Baku. 30 August. REPORT.AZ/ The Mexican government has covered its expected oil revenue for 2017 through a combination of oil-price hedges and budget-stabilization funds, guaranteeing a price of $42 a barrel next year, Report informs citing the RIA Novosti, the Mexican Finance Ministry said Monday.

The average price per barrel to be used in drawing up next year’s budget is below the $50 a barrel for 2016 but above the $41.45-a-barrel price of Mexican crude at the end of last week.

The ministry said the government spent $1.03 billion on put options that cover 250 million barrels of oil at the equivalent of $38 a barrel for Mexican crude, through 46 transactions in the global derivatives market with seven counterparts.

“The implementation of the hedging program for the 2017 budget strengthens the macroeconomic pillars and gives us certainty that public finances are protected against the adverse international conditions,” the ministry said.

Mexican governments have for years used derivatives to protect the budget against declines in world oil prices. The hedges act as an insurance policy: if the average price is below the hedged amount, the government collects money on the contracts at the end of the year. If the price is equal or higher, then the cost is the amount paid for the options.

Last year, the government collected a record $6.3 billion from the program after hedging oil at $76.40 a barrel, when the price averaged about $43. The government is also likely to make money on its hedges this year, as the price of Mexico’s crude has averaged $32.25 a barrel in the first seven months.

The State Oil Fund of Azerbaijan (SOFAZ) at times of higher oil prices could use such practice. By protecting the amount of budget transfers and there might not need to have devaluation of the manat.

The Finance Ministry said the budget proposal to be submitted next month to Congress will include an oil price estimate of $42 a barrel. The $4 per barrel difference between that and the hedges will be made up using money in a budget-stabilization fund, from which around $1 billion was set aside for the purpose.

The budget-stabilization fund is also used to pay for the put options, which this year were contracted between May 13 and August 25.