Mexico insures its oil budget each year with a secret $1B put-option purchase

Oil taxes finance a large share of Mexico's federal budget, so every price collapse forced emergency cuts. Rather than forecast where crude would go, the Finance Ministry decided to insure the forecast.

Since 2001 it has annually bought put options covering 200-300 million barrels from a small group of Wall Street banks and, later, oil majors, in what is considered the world's largest and most secretive annual oil trade. The quotes are solicited confidentially to avoid moving the market.

The premium averages around $1 billion a year. When prices crash, the options pay: Mexico collected a record $6.4 billion in 2015, and in 2017 it locked in an average export price of $46 a barrel.

The hedge is executed in tranches through banks including JPMorgan, Citigroup, Goldman Sachs and BNP Paribas, with Shell among the first non-banks to participate. The state oil company Pemex runs a smaller hedge of its own for its crude.

Don't forecast oil — buy insurance on it

A fixed premium makes the budget's oil risk known and financeable in advance.

Payouts arrive exactly when oil revenue collapses, smoothing the budget.

Secret, tranched execution keeps the annual trade from moving prices against Mexico.

The options cover volume the country actually exports, so the hedge is real.

If your budget depends on a volatile commodity, stop forecasting the price and buy the hedge: a known insurance premium converts an unpredictable crash into a fixed, budgeted cost.

The hedge has run for more than two decades, surviving changes of government; the 2020 program was executed through banks and Shell as COVID crushed prices, and analysts have debated whether the premium is worth the guarantee, but the budget keeps treating insurance as a line item.