Page 5 - LatAmOil Week 08 2020

LatAmOil COMMENTARY LatAmOil
 When asked about the matter by reporters, Deputy Finance Minister Gabriel Yorio struck a similar note, saying that disclosing additional information would put the government at a dis- advantage. If Mexico were to reveal more data, he explained, it would have to pay higher premi- ums each time it arranged the hedge.
Yorio declined to elaborate, though, and Mexican officials have mostly kept mum since then. The government did say in mid-January that it had taken steps to guard against oil prices dropping below $49 per barrel but divulged no further details.
“Of course”
Last week, though, Finance Minister Arturo Herrera spoke up.
In an interview with Bloomberg, he said that secrecy was an important consideration for Mexico. If too much information about the hedge reaches the public, he argued, the country will be negotiating from a weaker position each year.
“We need to be very careful about operating throughout time in a very discreet and disci- plined manner so that no one knows the [Mex- ican] government is operating and they can’t identifytheperiodswearecovering,”hetoldthe news agency. “Because if not, we’ll have prob- lems the following year.”
Herrerra also stressed, though, that the Finance Ministry had no plans to abandon the hedge. “Of course” Mexico will continue the practice, he told Bloomberg.
Keep quiet
The government has compelling reasons for continuing the hedge – and for keeping mum about the details.
World crude prices have been less than
steady over the past year, despite the OPEC-plus group’s efforts to stabilise the market by reining in production. Instead, they have been under no small amount of bearish pressure. Crude oil futures have actually trended downward, largely because of traders’ perceptions that supplies were ample enough to compensate for devel- opments such as an attack on key infrastructure facilities in Saudi Arabia, the intensification of US sanctions on Iran and Venezuela and sharp declines in Libyan production.
They have also taken a hit because of the coronavirus outbreak, which has triggered an economic slowdown in China, the world’s larg- est importer of crude.
Under these circumstances, Mexico will surely be keen to ensure that it does not lose money as a result of further volatility in com- modities markets. Instead, it will be looking for ways to ensure that money continues to flow steadily into its coffers.
In all likelihood, it will also be eager to ensure that the hedging programme does not become more expensive. As Yorio, Herrera and other officials have pointed out, Mexico runs the risk of having to pay higher premiums to the banks that execute the hedge if other parties learn enough details to try purchasing the same put options involved in the deal before the govern- ment can do so, thereby driving up the price. The Finance Ministry wants to avoid this, not least because it is already under strain as a result of market volatility and the ongoing decline in the country’s production.
In short, it hopes to find a way to make more money from the hedge while spending less money to do this. And it may be able to achieve this goal, but at the price of reinforcing percep- tions that it lacks transparency and is struggling to cover its expenses and obligations.. ™
“
be keen to ensure
Mexico will surely
that it does not lose money as a result of further volatility in crude oil markets
Pemex, the national oil company, also hedges its oil production (Photo: The Mazatlán Post)
Week 08 27•February•2020 w w w. N E W S B A S E . c o m P5