MEXICO CITY (Reuters) – Mexico’s finance minister said on Tuesday a $1.4 billion hedge program completely covered 2020 national oil income following a steep drop in crude prices, meaning there will not be a direct impact on the government’s budget.
The oil hedging program, the world’s largest financial oil deal, is designed to protect Latin America’s second-largest economy against oil price crashes.
“The hedge is usually not cheap, it is expensive, but it is for occasions just like this. Then the income part is covered, we will not have a direct impact on the budget,” Finance Minister Arturo Herrera said in a interview with broadcaster Televisa.
“But it is still a worrying situation,” he added.
International crude prices plunged by nearly 25% on Monday in their worst daily rout since the 1991 Gulf War. Top producers Saudi Arabia and Russia began a price war that threatens to inundate global oil markets with supply.
In January, the government said the finance ministry’s hedge had a total cost of $1.37 billion. It has not disclosed how many barrels the hedge covers, but said it had secured the price of $49 a barrel set in the 2020 budget.
Mexico produces some 1.73 million barrels of crude per day.
The protection is largely provided by put options, a financial instrument, but most years also includes backing from a budget stabilization fund to guarantee government revenue.
The crash in crude prices has intensified pressure on the finances of Mexican state oil firm Petroleos Mexicanos (Pemex), which is facing the threat of a ratings downgrade after posting one of its worst-ever losses last year.
(Reporting by Anthony Esposito; Editing by Frank Jack Daniel and Marguerita Choy)
