Mexico has spent $1.5 billion since July to hedge oil

[VIT]

Should they wait till 2009 to make this announcement when counter-party risk will be more certain :rolleyes:



MEXICO CITY (AP) -- 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.

http://biz.yahoo.com/ap/081113/lt_me...orts.html?.v=3

[GRG55]

Re: Mexico has spent $1.5 billion since July to hedge oil

Should they wait till 2009 to make this announcement when counter-party risk will be more certain :rolleyes:



MEXICO CITY (AP) -- 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.

http://biz.yahoo.com/ap/081113/lt_me...orts.html?.v=3

When politicians and bureacrats from a country with a production profile like this...



...decide to bet against their biggest revenue source, one wonders whether, looking back, this will be the petroleum equivalent of the BoE and gold in the late 1990's?

Just a thought...

[Tulpen]

Re: Mexico has spent $1.5 billion since July to hedge oil

Smart move!

That is exactly what futures are for.

[Tulpen]

Re: Mexico has spent $1.5 billion since July to hedge oil

When politicians and bureacrats from a country with a production profile like this...



...decide to bet against their biggest revenue source, one wonders whether, looking back, this will be the petroleum equivalent of the BoE and gold in the late 1990's?

Just a thought...

What are you talking about? They simply hedged their risks.

[blazespinnaker]

Re: Mexico has spent $1.5 billion since July to hedge oil

Yeah I love futures.

They reveal the real truth, that everybody is by necessity a speculator - especially those who speculate that there is no need to speculate.

[kelton56]

Re: Mexico has spent $1.5 billion since July to hedge oil

What are you talking about? They simply hedged their risks.

So you actually believe los hombres astuto y artificioso de Mexico can predict one-third of the future better than the rest of the world?

I'm with GRG55, $70 oil in 2009 is now the least likely outcome on the low side.

In fact, in seems like only yesterday - July actually - when SEM Group of Tulsa bet $3bn that oil would not stay long above $100 or so, and, hey, they were right!

They went bankrupt as word got out about their massive put position (short) and the sharks drove crude contracts to $147 and SEM out of business.

But they were right. Maybe los hombres astuto 7 artificioso de Mexico (politicians of Mexico) will be "right" also in 2009.

Of course, I would have preferred had they hedged ALL of 2009 production at $70.

[laphroaig]

Re: Mexico has spent $1.5 billion since July to hedge oil

So you actually believe los hombres astuto y artificioso de Mexico can predict one-third of the future better than the rest of the world?

I'm with GRG55, $70 oil in 2009 is now the least likely outcome on the low side.

In fact, in seems like only yesterday - July actually - when SEM Group of Tulsa bet $3bn that oil would not stay long above $100 or so, and, hey, they were right!

They went bankrupt as word got out about their massive put position (short) and the sharks drove crude contracts to $147 and SEM out of business.

But they were right. Maybe los hombres astuto 7 artificioso de Mexico (politicians of Mexico) will be "right" also in 2009.

Of course, I would have preferred had they hedged ALL of 2009 production at $70.

The article says they bought options, not futures. They did this precisely because they can't predict the future and they know it.

If oil skyrockets to $100+ they are laughing - they don't have to use the options and can sell at $100.

They just paid $1.5b in insurance to ensure that their finances remain stable even if oil stays at $50. They've traded a potential loss of $20 or more/barrel for a fixed cost of $4.50/barrel.

As Tulpen says, this is exactly what options & futures were invented for.

Maybe I've read this wrongly, but it sounds like people are looking at this thinking "why is the Mexican government speculating on oil - shouldn't they leave that business to the banks and hedge funds?"

If so, this just shows how far options & futures markets have been subverted from their original purpose by the FIRE economy!

The reporting in the original article is highly dubious too...

"...indicating that the oil-exporting country doubts its oil will consistently top that price next year."


It doesn't indicate this at all. You could equally say that because I took out home contents insurance for the year, this indicates that I think my house is going to be burgled this year. Not true. I acknowledge that there is a small chance of a ruinous event happening, so it's worth my while to pay a fee to cover me against that possibility. Same with the Mexican government.

[GRG55]

Re: Mexico has spent $1.5 billion since July to hedge oil

What are you talking about? They simply hedged their risks.

No they didn't. And time will show that to be the case.

P.S. Ask yourself exactly who took the other side of that trade? Goldman, or...?

[Tulpen]

Re: Mexico has spent $1.5 billion since July to hedge oil

No they didn't. And time will show that to be the case.

P.S. Ask yourself exactly who took the other side of that trade? Goldman, or...?

Yes they did hedge their risk. Really a no brainer. A producer going short the futures (or options on futures) hedges their risks.

The other side of the trade? Well, speculators of course and as things stand now they have to pay big time.

[Tulpen]

Re: Mexico has spent $1.5 billion since July to hedge oil

So you actually believe los hombres astuto y artificioso de Mexico can predict one-third of the future better than the rest of the world?

Do you understand the difference between hedging and speculation?

In fact, in seems like only yesterday - July actually - when SEM Group of Tulsa bet $3bn that oil would not stay long above $100 or so, and, hey, they were right!

They went bankrupt as word got out about their massive put position (short) and the sharks drove crude contracts to $147 and SEM out of business.

SEM group is not an oil producer, what they did is not hedging but speculating.

Hedging reduces risk.

[GRG55]

Re: Mexico has spent $1.5 billion since July to hedge oil

Yes they did hedge their risk. Really a no brainer. A producer going short the futures (or options on futures) hedges their risks.

The other side of the trade? Well, speculators of course and as things stand now they have to pay big time.

Tulpen: Have you noticed the whole world is running away from risk. That even longer term sovereign credits are being repriced as they are no longer considered "risk free".

In the world of commodities the entire global transport and trading system has nearly ground to a halt because banks won't issue LCs, because they have no idea if a "seized for default" cargo value will be worth enough in that event to cover the loan.

So where did these brainless speculators who apparently "have to pay big time" come from? Is there a hedge fund able to put up such a levered bet as collateral against their primary dealer credit line? I doubt it. Is there a pension fund or endowment that is still dabbling in "alternate investments"?

Whoever the counterparty is that took the other side of this bet is either going to default on the Mexicans if they have to pay, or has an absolute assurance they can cover it with taxpayer backstopped funds under one of the Paulson/Bernanke alphabet soup programs. Speculators my ass.

[Tulpen]

Re: Mexico has spent $1.5 billion since July to hedge oil

So where did these brainless speculators who apparently "have to pay big time" come from?

Inflationistas.

Lots of folks have loaded up on oil futures, gold futures and other commodities and even physical gold in the expectation that prices will go up due to the expectation of inflation.

But actually the opposite has happened. Trillions of dollars were destroyed and a couple of trillion of central bank and government funds has not make a single dent in that situation.

Now they are in denial and being sore losers by claiming that the exchanges are rigged. Rogers taking delivery of gold futures? I doubt he has the money left, he must have lost a significant part of his money, unless he does not invest the way he speaks and writes.

[GRG55]

Re: Mexico has spent $1.5 billion since July to hedge oil

Inflationistas.

Lots of folks have loaded up on oil futures, gold futures and other commodities and even physical gold in the expectation that prices will go up due to the expectation of inflation.

But actually the opposite has happened. Trillions of dollars were destroyed and a couple of trillion of central bank and government funds has not make a single dent in that situation.

Now they are in denial and being sore losers by claiming that the exchanges are rigged. Rogers taking delivery of gold futures? I doubt he has the money left, he must have lost a significant part of his money, unless he does not invest the way he speaks and writes.

Fair enough. Then with losses like they have already suffered one might expect that these idiot inflationistas will be unable to honor the contract and default. Thus leaving the Mexicans with no hedge after all?

I am in the other camp. Whoever is the counterparty has a US taxpayer-funded backstop. And they are not speculating.

This whole thing doesn't pass the smell test. I am going to make a guess that this is simply a covert way for the US government to try to help it's failing southern neighbour. Mexico is rapidly heading into dire straits; the drug cartels are assassinating police and politicians with increasing impunity. Its fiscal situation is deteriorating at a breathtaking rate. The last thing the USA needs is another failed state, especially one on its doorstep. But overt cash help to a foreign country is impossible in the current circumstances in the USA with unemployment rising and people losing their homes. So how 'bout a little help with the oil price. Wanna bet Hank's Goldman friends are part of this, and secured a handsome fee and took zero speculative risk to be the middleman?

Now the question becomes what will Mexico have to do at some point in the future to pay back the favour to Uncle Sam? See. They didn't reduce their risk after all...

[Starving Steve]

Re: Mexico has spent $1.5 billion since July to hedge oil

I don't understand any of this, but here is what I DO understand:

The standard of living in China and India is going up. People are buying cars. Energy consumption per captia rises as people travel by car. And this means the demand for oil is rising in China and India, regardless of what is happening in America.

Add to this, the standard of living is rising in the Middle East, and energy consumption per capita is increasing; so the same pattern is being observed in the Middle East. Then add-in Latin America and Africa, Russia, Eastern Europe, and the trend is underscored.

Worldwide recessions will come and go through the years, but the long-term trend is unmistakeable: People will enjoy a higher standard of living, and that means more driving and more energy consumption per capita, as time passes.

So, this puts pressure on oil supplies. That means an upward trend in oil prices.

This means that the odds of oil staying at $50 per barrel are slight, and the odds of oil returning to $150 per barrel are considerable.

Could oil go down to $40/barrel for five days? Sure. And I could live to be 85, too. In other words, a down-spike to $40 is quite likely.

Could oil stay at $40 or $50 for ten years? Sure. And I could live to be 120--- about the same long odds as oil staying extremely low for 10 years.

Could oil trend up to $150/barrel in five years? Sure. And I could live to be 76, about my life expectancy as a male at age 60. In other words, this is what is most likely to happen; this is where I want to place my bets.

So, I stay with my oil and gas trusts, my Husky Oil, my BP Oil, and I close my eyes and let the chips fall where they may.

Will solar energy replace oil consumption? No. Solar energy is a sad joke.

Will natural gas replace oil? Yes, but this will take decades. Similarly, will atomic energy replace oil? Yes, and this will take decades in transition time too. So, the gap has to be bridged by oil. There is simply no short-term alternative to oil.

As for how Mexico placed its bets in the oil casino, they decided to hedge their down-risk because they can not afford the risk of another 1980s peso crisis in a reverse oil shock. I respect that move.