Economic Hedging is Not a Trivial Task

 Last week, Bloomberg reported that Mexico has started executing its famous oil hedging program

Mexico has taken the first step in its annual oil hedging program, asking Wall Street banks for price quotes on the put options it buys to lock in prices for the following year, according to people familiar with the matter.

The Mexican oil hedge, which typically covers between 200 million and 300 million barrels, has the potential to roil the market as the banks writing the put options for the country’s ministry of finance hedge themselves in the market by selling oil and refined products futures and swaps.

The report also said that the Mexican hedgers are very good at hedging their oil production

Since the modern oil hedge program started in 2001, Mexico has made a profit of $2.4 billion — its hedges raked in $14.1 billion in gains and paid out $11.7 billion in fees to banks and brokers. The country also made money in the 1990s, when the hedge wasn’t done on an annual basis. Read more

However, not all producers know how to hedge

Despite Mexico’s hedging success, few other commodity-rich countries have followed suit. Ecuador hedged oil sales in 1993, but losses triggered a political storm and the nation never tried again. More recently, oil importers Morocco, Jamaica and Uruguay have bought protection against rising energy prices, but their deals had been relatively small.

Last month, Reuters reported that Iraq may consider hedging its crude oil production. However, the country’s producers are still not sure how to execute the hedge.

Iraq may look at hedging part of its crude oil production, the head of the OPEC member’s oil marketer SOMO said, as a way to protect government revenue against the risk of oil price volatility.

It is not clear what type of hedging might be considered by SOMO. Some organisations, such as Mexican oil monopoly Pemex, seek to ensure oil is sold at a guaranteed fixed price throughout the year, while others, such as Shell and BP, hedge their sales against short term oil price volatility.

“There are a lot of requirements that should be taken first: we need to study hedging carefully and train people, we need to know the best companies involved in hedging … we still don’t understand the hedging process completely,” Al Amri said, adding there was no certainty that Iraq would adopt hedging practices. Read more

So after all, hedging is not trivial!


ByMarketNews