Latin America

Oil is falling, but this big producer isn't worried

Mexico Finance Minister: Crisis & corruption

Mexico is one of the few oil producers that may not be concerned about the massive drop in the price of oil. Regardless of what a barrel of Mexican oil brings on the market, the nation will get $76.50 each for the 228 million barrels it exports next year.

Mexico has done so by using a massive hedge. The country finished its massive 2015 oil hedging program last month, buying put options this year to guarantee the $76.50 price, the minister of finance's office said. Mexico's oil is selling on the open market for $56 a barrel, and Brent crude is at a five-year low.

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Mexico's finance minister, Luis Videgaray, described it to CNBC as a "tremendous trade."

Mexico spent roughly $750 million on the hedges in September and October.

"We didn't do the trade for speculation," he said. "We do it to protect our budget for next year, so for next year regardless what the price of oil is, our revenue is protected."

Oil & stocks sell off

The Mexican government relies on oil revenue for about a third of its federal budget. As such, it has historically hedged the price of oil in order to establish certainty about the price. It's the largest state-run hedging program in world commodity markets.

The program doesn't always make Mexico a winner, as Videgaray pointed out. Sometimes Mexico leaves money on the table.

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"For the year 2014, we hedged at 85 (dollars), and the average turned out to be 90," said Videgaray, who holds a Ph.D. in economics from MIT. "It's like buying insurance—life insurance or health insurance, you buy it because you may need it, but you do not wish that you use it because something bad happens."

"If the price remains as low as it is—and no one knows where the price of the oil is going to be—but we are protected, and that's important," he said.

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