Oil Report

Mexico's oil hedge seen shielding public finances

MEXICO CITY, Nov 12 (Reuters) - Mexico’s move to lock in future oil sales at higher prices should help shield public finances next year when government spending will be important for pushing back against a slowing world economy, analysts said on Wednesday.

Mexico’s government is expected to provide more details on its hedging program on on Wednesday.

UBS analysts said in a research note last week Mexico appeared to have hedged the price of its crude exports for next year at around $70 per barrel, in line with its budget. Mexico's main export blend MEX-OSP now sells for $45.52 a barrel.

Oil prices have fallen dramatically in recent months and are expected to remain depressed next year as the financial crisis is expected to slow world economic growth.

Mexico depends on oil exports for about a third of government revenue, and surging prices in recent years have meant a windfall, some of which has been spent on improving the country’s shoddy highways and other infrastructure.

“The oil hedges will prevent the government from cutting spending,” said Alonso Cervera, an economist at Credit Suisse.

Spending reductions would be bad for growth next year, when some economists expect Mexico’s economy will slip into a recession due to weaker U.S. demand for its exports.

Still, the 60 percent plunge seen in oil prices since July is good news for Mexico’s inflation outlook.

Mexico imports much of its gasoline from the United States. Falling U.S. fuel prices mean Mexico’s government may stop an aggressive campaign to push up prices at the pump, said Actinver-Lloyd portfolio manager Rogelio Gallegos.

Mexico is the world’s No. 6 producer of crude by volume and a top supplier of the United States.

So far, Mexico has only confirmed that it made hedges in the oil market, but analysts at UBS say it has probably locked in prices on 90 percent of its crude exports for next year. That would be a marked increase in the amount of hedging it normally undertakes.

“It’s a good thing that for once they did their job,” said Gallegos.

Despite hedges on the price of oil, Mexico’s government still risks a drop in tax revenues next year if the economy falls into a slump.