Mexico’s Finance Ministry on Monday said it had wrapped up what traders consider the world’s biggest sovereign derivatives trade, guaranteeing an average price of $42 per barrel for crude oil exports in 2017.

Due to the government’s dependence on oil income, Mexico hedges its crude every year and the deals are closely watched by the market since the trades are big enough to affect prices.

The ministry said in a statement that it had bought put options at an average price of $38 per barrel to cover 250 million barrels of crude at a cost of $1.03 billion, or just over 19 billion pesos.

The price of Mexico mix of crude oil traded around 42.19 per dollar on Monday.

The ministry said it began buying options on May 13 and finished on Aug. 25, adding it had set aside another 18.2 billion pesos from its budget stabilization fund to cover the remaining $4 per barrel.

Mexico has been pledging to cut spending due to the global slump in oil prices since late 2014 and last week Standard & Poor’s on Tuesday lowered the country’s sovereign credit outlook to negative from stable.

Mexico increased the amount of crude exports it will hedge next year by 18 percent compared to this year. Last August, the government said it had paid over $1 billion to hedge 212 million barrels of oil exports at an average price of $49 per barrel to support the 2016 budget.

The finance ministry did not explain in its statement why it had hedged more oil output even as production has been declining at the state-run oil company Pemex.

But Deputy Finance Minister Miguel Messmacher told local radio that the government would propose liberalizing gasoline prices next year, instead of 2018 as was planned under a landmark energy reform.

The finance ministry currently sets gasoline prices and Marco Oviedo, an analyst at Barclays in Mexico City, said the increase in the amount of oil that was being hedged would compensate for less income from fixed gasoline prices.

“They will be more exposed once gasoline prices are liberalized,” Oviedo said.

Mexico had purchased put options in 2014 that locked in an average price of $76.40 per barrel for 2015, when Mexico’s crude mix averaged just above $43 a barrel.

Those derivatives translated into $6.284 billion to help the government offset a drop in income from crude sales.

Source: www.reuters.com