Mexico’s oil hedging programme – a highly secretive deal that is the largest single trade in crude markets – appears to be unfolding in public for the first time, according to traders.
The public disclosure of a large options trade on a new database has led to speculation that the country’s government has locked in a price for most of its oil exports next year.
Put options locking in the sale of 5m barrels of crude for at least $80 per barrel were this week publicly reported on a swap data repository, a type of information warehouse. The trade was labelled with the prefix Maya, the name of Mexico’s main crude stream.
US regulators now require reporting the terms of off-exchange derivatives deals to swap data repositories in a push for more transparency.
“It’s a nightmare,” said an oil industry executive. “We have reality TV shows. Now we have reality trading. Nothing is confidential any more.”
Mexico, the Americas’ third largest crude producer, is highly dependent on oil exports, valued at $42.7bn in 2013.
About a third of its federal budget is funded through taxes on Pemex, the state oil company. The government annually buys options contracts from Wall Street banks as insurance against declines in the price of crude.
“The objective is to minimise the cost of the hedging programme; therefore, minimising its visibility is extremely important,” two Mexican central bank officials wrote in a 2012 book on commodity price volatility.
Traditionally, options deals between banks and the Mexican government were not reported to the wider market. Mexico expects to produce 2.4m barrels of oil per day next year and export 1.09m b/d on average.
The trade took place on Wednesday and appeared in data repository records compiled by Bloomberg, the financial data provider. A dealer was paid $7.85m, implying an options premium of $1.57 per barrel.
People familiar with Mexico’s oil programme said the code associated with the trade – “MAYAPLBOM” – referred to Maya crude. But market participants were uncertain whether the transaction, expected to be one of many, represented the beginning of Mexico’s annual oil hedge or its tail-end. Mexico typically executed the hedge in tranches of 5m barrels apiece, said a person familiar with previous deals.
Traditionally, the hedging programme began in mid-August and ended around the middle of September so it was surprising to see the first report of a Maya option deal this week. “My speculation is they did a lot of the programme already,” this person said.
Citigroup and JPMorgan Chase – which participated in last year’s programme – are believed to be involved again, alongside BNP Paribas, according to market participants. All the banks declined to comment.
Mexico, which is opening up its oil industry after nearly eight decades under state control, projects in its 2015 budget an average price of Mexican-produced oil of $82 per barrel, down from $94 this year. The Mexican Finance Ministry declined to comment.
Agustín Carstens, head of Mexico’s central bank, previously warned the US financial reforms could affect its hedging programme. Speaking in 2009 before the passage of the Dodd-Frank law, he called for a balance to be struck between transparency and liquidity, according to a report in Risk magazine.
“Liquidity in markets should be assured and flexibility should be supported,” he said. “Without that, hedging programmes such as ours would be unthinkable.”
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