Trading in crude choices and futures soared last week as market members prepared for Mexico’s annual oil hedging plan, in which the nation buys up to $1 billion in deals to guard its oil revenues.
The global oil derivatives market strengthens itself every year in late spring and summer for the hedge, the market’s largest and most secretive monetary oil contract. This year, Mexico has come across several hurdles in executing the hedge, and timing has become a vital factor.
Investors and brokers who monitor cash flows said that activity in crude choices and futures means that Wall Street has begun to position itself for the trade, trying to secure safety against further value volatility.
It was not clear whether Mexico has begun fulfilling the hedge. The Mexican Finance Ministry didn’t instantly reply to a request for comment. Investors have had to react to declining sentiment in oil markets.
Potential volatility, a gauge of options demand, for 2020 deals has risen steadily over the previous week, dealers stated. Prices for 2020 choices started to rise after a top Finance Ministry official said Mexico had completed calibrating the formula employed as a basis for this system, market sources said.
Mexico aims to guard itself using put choices it buys from a some of Wall Street banks and oil giants in about 50 transactions often carried out between May and August.
Oil futures throughout the forward curve decreased on Thursday, with average Brent crude costs for 2020 slipping to the weakest in a month. Options that Mexico usually buys defeated last week, one broker stated, noting trades in a series of put deals that expire in 2020. Put choices give holders the right to sell at a set value by a particular date and are widely employed by producers to guard revenues against declining rates.