Mexico oil hedge gets green light with details to be ironed out

[MEXICO CITY] Mexico's Finance Ministry got the green light to hedge the country's oil production for next year but is still fine-tuning the details, according to people with direct knowledge of the transaction.

An internal committee just approved the decision that Mexico would lock in oil prices for next year in what's considered Wall Street's largest -- and most secretive -- annual energy deal, according to one person. The ministry will begin meeting with the central bank next week to start defining Mexico's plan, the person said.

The hedge will start soon, but it's unclear how much will be hedged and at what price, another person said. Traditionally, Mexico takes a few days or weeks between deciding to go ahead with the hedge and starting to implement it. The people asked not to be named, as they're not authorized to speak publicly on the matter.

The oil hedge, a multibillion-dollar deal which in the past typically covered between 200 million and 300 million barrels, has the potential to roil the market. Banks writing put options for Mexico -- contracts that give it the right to sell oil at a predetermined future price -- hedge themselves in the market by selling futures and swaps.

This year, the process has been a bit trickier. Mexico is planning to change the pricing formula for its flagship Maya crude to reflect global reductions in fuel oil sulfur content that take effect in 2020. Earlier this month, Deputy Finance Minister Gabriel Yorio appeared to leave the door open to not hedging altogether when he said Mexico is evaluating it and would inform the public "if we do it."

In 2018, the hedge had already begun by mid-year, in 2017 Mexico took its first steps to do so in June. In 2016, it began in June. Prior to that, the usual hedging period had been late August to late September. Last year, the country spent more than US$1 billion to lock in prices for 2019.

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