Jump in oil prices could prompt Mexico to hedge

The recent jump in oil prices could tempt Mexico to enter the futures market and start hedging its 2010 crude exports due to the looming fiscal headache the country faces next year.

U.S. oil futures have jumped more than 35 percent since the start of May on optimism over the global economy and worries that heavy government stimulus spending could spur inflation.

Crude hit a seven-month high above $70 a barrel on Friday as traders bet that the worst of the global economic downturn had passed. Oil prices for 2010 are even higher, with December futures trading above $77 a barrel.

Mexico depends on oil revenues to fund more than a third of the federal budget. With the economy expected to stagger into 2010 battered by this year's deep recession, politicians will be keen to maintain spending levels to support growth.

The government expects the economy this year to turn in its worst performance since 1995, contracting about 5.5 percent due to a steep fall in manufacturing exports to the United States.

The finance ministry last year avoided a potentially devastating blow to the 2009 budget when it hedged the country's net oil exports -- a move hailed by economists and crude traders alike.

Mexico quietly shelled out $1.5 billion in the second half of 2008 as oil prices climbed to record highs near $150 a barrel, locking a minimum price of $70 a barrel for more than 300 million barrels of oil exports.

"They are very wise traders and they are very accustomed to the boom and bust of the oil industry," said Phil Flynn of Alaron Trading in Chicago.

"I think any producer starts thinking about hedging when they see oil prices at $70 a barrel."

Mexico's finance ministry declined to comment on any possible hedging plans for this year or 2010 and oil traders said there were no signs that Mexico is doing any hedging right now.

NOT SO EASY THIS TIME

Mexico faces a tough year in 2010 with the recession pressuring tax revenues and bond investors keen to see if government revenues will be disrupted.

The finance ministry in April forecast in a budget planning document that Mexico's crude oil export basket would average only $48.30 a barrel next year, well below the $70 a barrel assumed in this year's budget.

Combined with ongoing production problems expected to chop crude oil export volumes by 18 percent in 2010 to 1.125 million bpd, Mexico faces some difficult decisions.

The government has come under pressure from ratings agencies and the country's central bank to wean the budget off its dependence on oil revenues. But lawmakers are loathe to raise taxes as the country emerges from recession.

Mexico could post a deficit equivalent to 2.9 percent of gross domestic product in 2010 due to the tax shortfalls, Citibank's local unit said in a recent research report.

However, hedging oil exports will not be as easy this time as in 2008 because there are fewer investors in longer-dated oil futures and options this year, oil market experts said.

Hedge funds and pensions that invested heavily in oil in 2007 and 2008 have trimmed their exposure to longer-dated futures and options, reducing the number of contracts on the market and making it more difficult for a large player like Mexico to quietly build a big position.

Oil prices may not yet be high enough to justify the expense of hedging for Mexico, market watchers said.

"Its one thing to get a $70 put option when oil is at $140 a barrel, its another to get $70 when oil is trading near that level," said Tim Evans of Citi Futures Perspective in New York.' (Editing by David Gregorio)

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