Mexico, which has been suffering as a result of lower oil price since 2015, has now taken up a concrete step to protect the economy, mainly the oil revenue from further downside. Both the global benchmarks, Brent and the WTI, after making a bottom in February around $27 area, have jumped back to trade around $50 per barrel by June, however, since then the bulls have repeatedly failed to break above $50 area and have come under renewed downside pressure and global supply glut persists. The fear of further downside probably prompted Mexico to take up such a step.

According to the latest report, Mexico has spent more than a billion dollar to hedge its oil price at $42 per barrel for the year 2017. This year’s hedged price was $49 per barrel. Last year it was around $76 per barrel. The government’s annual hedging program will cover 250 million barrel of oil for next year. The biggest beneficiaries of this one of the biggest sovereign oil hedging would be the Wall Street dealers since the Mexico government used put options to hedge prices.

While options tend to be expensive compared to forwards or futures, Mexico government intends to keep the upside open while keeping a backstop to the downside.