For most of this year, the banks’ trading houses have been earning vast sums of money promoting the “correlation trade” (sell the US$, buy crude oil, gold and equities). As a result, around 150mbbls of oil and oil products is now in floating storage, with much more on land.
Next year, the same traders and brokers might well decide there was more money to be made from promoting a different trade. They might argue, for example, that the world economy was still too fragile to afford $80/bbl oil, and instead suggest oil should be sold, not bought.
These things happen. But they can cause problems for those who have to budget forward. Governments dependent on oil revenues, for example, find it difficult to simply ‘turn off the tap’ on spending, just because prices on the NYMEX futures exchange have fallen.
This is behind Mexico’s decision to hedge its entire crude oil output for 2010 at $57/bbl after costs. All 230m bbls have been hedged, as a follow-up to 2009’s successful hedge at $70/bbl. This added $5bn to government revenues in H1, a critical sum for any organisation.
Hedging often gets a bad name, when it is used to describe a trading activity. But as Mexico’s Finance Minister, Agustin Carstens, noted ““We want this as an insurance policy. If we don’t collect any resources from this transaction, it’s OK with us. That would mean the oil price had remained above $57 a barrel“.
The blog suspects that Mexico’s $1bn insurance premium for its hedging strategy may again prove money well spent in 2010.
- Our work
- REPORTS
- The pH ReportMonthly focus on what is driving the global economy
- NewsletterWeekly spotlight on a key issue impacting the global economy
- New Normal eBookBoom, Gloom and the New Normal: How the Western Babyboomers are Changing Demand Patterns, Again
- White PaperA Roadmap for the Global Energy Sector – IEA May 2021 report synopsis
- White PaperRenewable Carbon for Chemicals and Derived Materials – Nova-Institute April 2021 report synopsis
- REPORTS
- About us