Qatar joins Mexico with oil hedge

Posted on October 26, 2011

AFP

Qatar, a member of the Opec oil cartel, has joined Mexico in taking out an insurance policy against falling oil prices next year, hedging some of its oil for 2012 as both nations adopt a cautious view about the global economy.

Mexico hedges oil prices every year, but bankers said that Qatar has taken out insurance only rarely over the last two decades. The programme by Mexico is the world’s largest single hedge in commodities markets by value and one of only a few implemented by a sovereign entity, rather than a company.

The hedge by Qatar comes after Middle East countries have raised public spending sharply to quell public discontent on the back of the Arab Spring. Economists say that Gulf nations would need much higher oil prices to balance their budgets.

Bankers and brokers said that Mexico and Qatar bought put options – contracts that give the holder the right, but not the obligation, to sell at a predetermined price and date – on the private, bilateral over-the-counter market over the summer. Signs that one or several big producers were hedging emerged in August as brokers in New York, London and Geneva noted a significant surge in options for 2012.

Oil brokers said that Mexico hedged the bulk of its net exports for the year, as it has done in the past, of around 800,000 barrels a day at a price of around $75 per barrel for the West Texas Intermediate crude. Qatar, however, hedged only a portion of its oil exports, with some brokers estimating about 200,000 b/d, a quarter of its annual oil output. No price was available for Qatar.

Qatar oil officials did not respond to phone calls and emails seeking comment. Bankers and brokers pointed that Credit Suisse and Goldman Sachs were the most likely parties behind the Qatari deal. Both banks declined to comment.

In August Mexico officials acknowledged they were testing the oil market. “We are evaluating conditions [for a hege]” deputy finance minister Gerardo Rodriguez said at the time, without providing more details. The Latin America country has spent in the past about $800-$1bn buying put options to secure oil prices.

Mexico has in the past described its oil hedge as insurance “against a really bad outcome” for the global economy rather than a bet on the oil market direction. The government relies on oil for up to 40 per cent of its revenue, according to official figures. The hedge is now even more important as oil production is declining rapidly, down from 3.9m barrels a day in 2005 to 2.8m b/d this year.

Qatar relies on oil and natural gas income for 54 per cent of its fiscal revenues, according to estimates by the International Monetary Fund. The Washington-based institution warned the country last year that a collapse in oil and natural gas prices would have “adverse implications” for fiscal revenues.

Additional reporting by Gregory Meyer in New York and Emiko Terazono in London

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