Mexico scores $2.5 billion windfall from oil hedges, report says

• Mexico is set to receive a $2.5 billion payout from its annual oil price insurance policy, according to a report from Bloomberg.
• The $2.5 billion windfall would represent just the fourth time in the last two decades the country has benefited from its oil price hedges, according to Bloomberg.
• The windfall comes as infighting among OPEC members threatens a production cut deal.
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Mexico is set to receive a $2.5 billion windfall from its annual oil price hedges, according to a report from Bloomberg, which cited people familiar with the transaction.

The country, which itself is a sizable oil producing nation, has been utilizing an annual oil price hedge for decades as it looks to protect itself from volatile swings in the price of oil.

The $2.5 billion payment will mark Mexico's fourth oil hedge payment in two decades, Bloomberg said.

The hedging profit comes at a time when infighting among OPEC members threatens a production cut deal designed to help shore up oil prices.

Every year, Mexico secures its oil revenue through options contracts it buys from a group of investment banks and oil companies. The oil price insurance policy runs annually from December 1 to November 30, according to Bloomberg, and often represents Wall Street's largest annual oil deal.

The hedge has consistently protected Mexico from steep oil price declines in 2009, 2015, and 2016. Those hedges led to windfalls of $5.1 billion, $6.4 billion, and $2.7 billion, respectively, according to Bloomberg.

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The oil contract gave Mexico leverage to walk away from an OPEC+ production cut agreement earlier this year, and the $2.5 billion payout comes at a time when Mexico's government is strapped for cash as it deals with a deep economic recession caused by the COVID-19 pandemic, Bloomberg reported.

While the Mexican government has yet to disclose the official amount it received from the options contract, it did release some financial data earlier this year that allows analysts to estimate the windfall.

"Assuming that Mexico hedged around $45-$47 a barrel, and that it secured a similar volume as in previous years, it stands to receive a payout in excess of $2 billion," Bloomberg explained.

Both WTI and Brent crude oil traded up a half percent in Wednesday trades.