| HOUSTON/NEW YORK
HOUSTON/NEW YORK Aug 5 Mexico has begun
structuring its oil hedging program for next year, market
sources said on Tuesday, citing one of the world's biggest
sovereign hedging programs as weighing on crude prices.
The annual hedge, run by Mexico's finance ministry to
protect public finances heavily dependent on crude revenue,
typically occurs around August and September each year and its
timing is still closely watched by traders as its sheer size can
move markets. Some traders said a pick-up in options volatility
was likely tied to anticipated hedging activity from Mexico.
Traders said talk of the hedging may have contributed to a
recent downturn in prices, with U.S. benchmark crude having
fallen more than 5 percent in two weeks to its lowest since
January. However, some analysts noted that prices for 2015 and
beyond have not fallen as quickly, which would be expected if
Mexico were hedging next year's production.
"They are already doing their hedge for 2015. There are a
couple of banks involved," said a trader who spoken on condition
Goldman Sachs Group Inc could be involved in the 2015
program, after participating in last year's operation, the
The finance ministry did not immediately respond to requests
for comment. A spokesman for Goldman Sachs declined to comment.
The 2014 Mexican oil hedge was executed by at least three
banks, also including JPMorgan Chase and Co and Barclays
Under the program, Mexico buys options to guarantee a
minimum value for its crude, selling contracts for future
delivery at the locked-in price.
"This is the time of year they normally do their program,"
said an energy hedge fund trader with knowledge of Mexico's
"They are fairly regimented, mostly buying OTC puts, which
then get hedged by the desk selling to them," the trader added.
It was not yet clear how much of its annual exports Mexico
will hedge for next year.
One possible indicator of the increased hedging activity is
a pick-up in oil market implied volatility, a measure of demand
for options, another trader said.
The CBOE's oil volatility index has jumped to more
than 19 from 16 over the past week, nearing its highest since
March. But it is still depressed relative to historical norms,
following a prolonged period of comparatively calm prices and
The oil hedge program, which cost the country at least $450
million for 2014, is designed to protect government finances
from a precipitous drop in oil prices.
Mexico, the world's 10th-largest crude producer,
historically relies on national oil company Pemex to
finance about one-third of the annual federal budget.
In 2009, Mexico's oil hedges were a lifesaver for the
country when international crude prices crashed precipitously
far below the locked-in price.
Mexico averted disaster that year by locking in a minimum
price for its net oil export volumes and staggered through its
worst economic downturn since the 1990s.
The country's crude output has dropped by a quarter since
reaching a peak of 3.4 million bpd in 2004, and this year
expects production to slide to an average of 2.44 million bpd,
the lowest since at least 1990.
(Additional reporting by Jonathan Leff and Anna Sussman in New
York and David Alire Garcia in Mexico City; Editing by Simon
Gardner and Steve Orlofsky)