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Mexico Spends $1.5 Bln to Hedge Falling Oil Prices

Julie Watson - Associated Press
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Mexico City - Mexico, the third-largest supplier of oil to the U.S., has spent $1.5 billion since July to hedge against falling oil income and protect public spending for 2009, Treasury Secretary Agustin Carstens said Thursday.

The government bought so-called put options to sell 330 million barrels of Mexican crude, about a third of its current estimated annual output, for $70 a barrel, indicating that the oil-exporting country doubts its oil will consistently top that price next year.

The move guarantees Mexico at least $9.5 billion in extra income if its oil stays below $70 a barrel, Carstens said. But if its crude sells for more, the country could lose.

Oil is Mexico's biggest source of foreign income, and revenue from state oil monopoly Petroleos Mexicanos, known as Pemex, accounts for nearly 40 percent of federal spending.

While such hedging is common, Mexico this year spent at least 2.5 times more than it has in the past to cover potential price declines - exposing the depth of its concern over the impact of falling oil prices, said Allyson Benton, a Mexico analyst at the Eurasia Group consultancy in New York.

Congress approved Mexico's 2009 budget on Wednesday, boosting spending by 13 percent to jump-start its slowing economy amid the global financial crisis. The budget, which includes a 1.8 percent deficit, the country's first in years, assumes crude prices of $70 a barrel.

Mexican crude closed Thursday at $41.72 a barrel, Pemex said. West Texas Intermediate, a benchmark crude commonly used to cite global oil prices, was trading around $59.48 a barrel.

Fitch Ratings lowered its sovereign credit outlook for Mexico to "negative" on Monday, citing the potential effect of a U.S. recession, reduced capital flows and decreased oil income.

But the Treasury Department has said a stabilization fund containing $5.6 billion in windfall oil income will help Mexico maintain spending throughout the economic downturn.

Mexico began its current wave of hedging at the end of July, signing derivative contracts with "extremely credible" international financial institutions, Carstens said, declining to disclose their names.

"They're great traders," Phil Flynn, an analyst at Alaron Trading Corp., said of Mexico, noting the country had hedged exports earlier this year, selling at near record levels.

"If the economy continues to slow, they're looking like geniuses" in 2009, he said.

It wasn't clear if other oil-exporting countries have sought to lock in higher prices with similar hedges, in case they continue to slide in coming months. Many might hesitate to disclose such bets give the political cost of losses, analysts said.

Pemex produced about 2.8 million barrels of crude a day between January and September, exporting 1.4 million.