<article><p class="lead">Mexico's oil hedge will cover 77pc of federal government oil revenues this year, but just 36pc of the fall in total crude revenues amid the global crash in crude prices.</p><p>"The hedge is a buffer in these types of events and we estimate it will provide Ps150bn ($6.1bn)," independent think tank the Center of Budgetary and Economic Investigation (CIEP) said on 21 April.</p><p>Total oil revenues are divided between Pemex revenues from sales and federal oil revenues drawn from royalty and production taxes levied on Pemex.</p><p>At the beginning of the year, total oil revenues were forecast to hit Ps987.3bn, or around 16pc of all federal revenues.</p><p>But the finance ministry has since cut that forecast and now expects to receive Ps414.7bn, or 44pc less at an average $24/bl for the rest of the year.</p><p>While the estimated Ps150bn payout under the hedge will cover 77pc of federal oil revenues, the hedge will only cover 36pc of the Ps415bn fall in total crude revenues, CIEP said.</p><p>"What use is $6bn under the hedge if Pemex is losing $20-$50bn by being forcing to produce and refine at a loss," analyst Pablo Medina said yesterday. "Do the math, the hedge will not save Mexico."</p><p>Each year, the finance ministry undertakes a series of secretive deals — thought to be the largest of its kind — to hedge oil revenues in the event of a decrease in crude prices. The hedge typically covers 250mn bl, or the equivalent of annual net exports.</p><p>This year's $1.37bn hedge, using put options, was locked in at a price of $49/bl of crude, based on a 1.9mn b/d production platform.</p><p>While around $14bn has been paid out under hedges since 2001, this year's payout will be the largest given the global rout in crude prices that started in March. Finance minister Arturo Herrera had said previously that the hedge would cover all government oil revenues.</p><p>Mexico's crude basket price that reflects a mix of its export grades dropped to $-2.37/bl on 20 April from an average $48.55/bl in February — the first negative price in history — as the Covid-19 pandemic battered demand and a price war between Saudi Arabia and Russia threatened to flood an already oversupplied market.</p><p>The Opec+ group of countries on 12 March agreed reductions to output — Mexico will cut 100,000 b/d in May and June — and brought the price war to an end, but this has failed to raise prices.</p><p>Since 2017, Pemex has contracted its own separate hedge and this year expects to receive Ps7.5bn covering about 14pc of output, director Octavio Romero said previously.</p><p>State-owned Pemex's most recent production forecast for the year was 1.75mn b/d — up from 1.64mn b/d in February — but President Andres Manuel Lopez Obrador said this week that production may be further cut at new fields given the fall in crude prices.</p><p class="bylines">By Rebecca Conan</p></article>
