The news that Mexico has locked in a price of $70 a barrel for 100% of next year’s oil exports has surprised many traders, and demonstrated the depth of the oil derivatives markets.
Mexico has protected $37bn of revenue from oil sales, vital to its 2009 budget, at a cost of just $1.5bn. It is believed to have done so, far-sightedly, in late September and early October, while oil was falling from about $120 towards $90.
The government has already revised its budget, lowering its oil price target from $80 to $70.
With oil now dropping through $60, the country’s budget would have been devastated if it had not hedged so much of its production and if prices stay low. Oil revenues make up nearly 40% of public sector income.
By warding off this disaster, Mexico will likely have protected the public finances, its credit...