Mexico’s lucrative Hacienda hedge

Every year “the men from Hacienda” – named after the location of Mexico’s finance ministry – meet to hedge their country’s oil output, says Javier Blas in Bloomberg Markets. By buying put options – contracts that allow Mexico to sell its oil to Wall Street banks at a predetermined price, even if the actual price of oil later falls – the country has been able to lock in a more certain revenue stream. Over the last ten years, the notional value of the hedge has added up to $163bn – a sum so big, it became “the deal all banks wait for each year”.

Back in the 1990s, UN sanctions on Iraqi and Kuwaiti crude following Iraq’s invasion of Kuwait removed 10% of the world’s supply of oil. Mexico enjoyed the benefits as prices jumped from $15.06 a barrel to $41.15, but the government of Carlos Salinas de Gortari sensed that the good times couldn’t last.

Looking for security from fluctuating oil prices, Mexico decided on the hedge. The result was “what quickly became the world’s largest and best concealed oil trade”, says Blas. The country, which is the world’s 12th-largest oil producer, has always shrouded the deal in secrecy, lest trading houses and hedge funds get wind of its intentions and front-run its orders.

In July 2008, just 11 days after the oil price reached an all-time high, representatives from three Mexican government ministries and Petróleos Mexicanos, the state energy company, audaciously wagered on a price crash. While the world edged closer to a financial crisis, a group of Wall Street banks sold Mexico put options on 330 million barrels worth $1.5bn, “enough to meet the annual oil imports of the Netherlands”.

The bearish bet paid off, as oil prices quickly went into free fall. In December 2009, the proceeds from the wager totalled almost $5.1bn. In 2015, Mexico earned $6.4bn and $2.7bn the next year. But it isn’t the only winner from the Hacienda hedge. The banks involved each make annual profits of between $30m and $80m from fees and from making related bets on oil with other investors.

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