UPDATE 3-Mexico hedges bulk of 2010 oil exports at $57/bbl

Tue Dec 8, 2009 4:33pm EST

Related Topics

* Mexico hedges 230 million barrels of oil for 2010

* Put options guarantee at least $57 a barrel

* Mexico earned $5.089 billion from 2009 oil hedge (Adds details on 2010 Mexican oil exports, analyst quote)

By Ed McAllister

NEW YORK, Dec 8 (Reuters) - Mexico has hedged much of its 2010 net oil exports at $57 a barrel, the government said on Tuesday, continuing the conservative strategy that reaped huge profits in 2009 after the credit crisis crushed oil prices.

Finance Minister Agustin Carstens said Mexico paid $1.172 billion for options that guarantee a minimum price of $57 a barrel for 230 million barrels of oil exports next year.

That is 100 million barrels less than a similar hedge put in place for 2009.

Carstens did not name Mexico's counterparties but a source familiar with the transaction said Barclays Plc (BARC.L) was one of the institutions involved in the transaction.

Barclays declined to comment.

The 2010 hedge covers approximately 630,000 barrels per day of oil exports. Mexico plans to export just over 1.1 million bpd of crude next year, but imports of gasoline and other refined products are expected to exceed 500,000 bpd in 2010.

Oil market analysts hailed the move as a savvy trade that will protect a major source of Mexico's government revenues at a relatively low cost as the country's economy emerges from its worst recession since the 1930s.

"They have made another smart trade," said energy futures analyst Phil Flynn of PFGBest Research in Chicago, who added the big position could become a major market influence if oil prices decline in the new year.

"If the dollar strengthens and oil demand growth is not as strong as many people are hoping, we could see oil test these price levels. That makes this a good trade," said Flynn.

UNUSUAL HEDGING

Mexico's oil hedging is unusual. Few other major oil exporters try to lock in prices, especially on volumes as large as Mexico has done the last two years.

The government did not say why the hedge was smaller than in 2009, although Mexican crude production has been declining since 2004 while oil product imports have been rising rapidly due to limited domestic refining capacity.

Mexico locked in a minimum price of $70 a barrel for its net oil exports this year as crude prices surged to record highs in the summer of 2008.

Mexico's counterparties in its 2009 hedging strategy, including Deutsche Bank (DBKGn.DE), Barclays, Goldman Sachs (GS.N) and Morgan Stanley (MS.N), paid the government $5.085 billion on Monday, Carstens said.

The 2010 hedge uses the put option strategy that proved successful in 2009, the finance ministry said.

Put options grant the holder the right, but not the obligation, to sell at the strike price.

Mexico's recent oil hedging track record is far more successful than other major market players, such as airlines, who have been wrongfooted by the wide sings in the price of crude this year.

Mexico's use of options rather than flat price swaps or futures positions allowed it to reap the benefits of a floor price early in the year as oil crashed below $40 a barrel while still leaving open the upside as crude rallied in the second half of the year.

Rumors that Mexico may have been hedging its 2010 oil exports jolted futures markets earlier this year. But the hedge is unlikely to have an immediate market impact because it does not come due until the end of 2010 and also due to the wide spread between the oil price and the options strike price.

Fitch Ratings downgraded Mexico's public debt in November, citing the country's heavy reliance on the waning oil industry to fund government spending. Taxes on oil account for more than a third of federal revenues.

The country's Congress set the average oil price in the 2010 budget at $59 per barrel after the administration had sought a more conservative estimate. (Reporting by Ed McAllister and Robert Campbell; Additional reporting by Juan Lagorio in New York; writing by Robert Campbell in Mexico City; Editing by Marguerita Choy)

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