The hacienda hedge

[OddTrader]

So who's prices are really subsidized?

Weird re Mexico though... I surely thought they would've had lower prices.... Do they have their own refineries?

Price should be logically dropping during year 2008, as in the US and OZ. Almost for the whole world.

But Mexico price was going up 2007-2010!?

 

[Maverick74]

I would agree with @Pekelo... I think he's saying that the local market is the domestic one. And as a large oil producing country, Mexico is likely to set the prices for that, or at least they could/should... just like Venezuela does. It's not really subsidizing, but there is an opportunity cost indeed, by not pumping all oil at higher prices abroad.

But we in Australia are having a similar discussion regarding our gas supply. We export a lot, probably at low prices... I heard Japan for instance makes more money on Australian gas than we do on that export to Japan. But, we could hit a supply shortage due to oversees contracts... than there should be a backstop for domestic use, likely at lower prices....

So I would think Mexico would do the same. They would have some qty of oil dedicated for domestic markets. Any producer should do that.... I'm not sure about petrol prices in Mexico, but I would think they are significantly lower than the US.

Jack, there is no such thing as oil. There is such a thing as oil grades. Mexico and Australia do not have the same oil. Mexican oil is called Maya, it's a heavier api then WTI and therefore trades at differential to WTI. I don't know the api of Australian oil offhand but that is why prices are different. Mexico does NOT set the price. They are NOT Venezuela. My God if they set their prices low, Sle and I will set up an arbitrage business where we buy their oil, blend it to meet the delivery requirements into Cushing and sell WTI futures to lock in the free arb.

 

[sle]

My God if they set their prices low, Sle and I will set up an arbitrage business where we buy their oil, blend it to meet the delivery requirements into Cushing and sell WTI futures to lock in the free arb.

Yeah, with hookers and blackjack!

If you had to guess, what vol spread they had to pay on these?

 

[JackRab]

Jack, there is no such thing as oil. There is such a thing as oil grades. Mexico and Australia do not have the same oil. Mexican oil is called Maya, it's a heavier api then WTI and therefore trades at differential to WTI. I don't know the api of Australian oil offhand but that is why prices are different. Mexico does NOT set the price. They are NOT Venezuela. My God if they set their prices low, Sle and I will set up an arbitrage business where we buy their oil, blend it to meet the delivery requirements into Cushing and sell WTI futures to lock in the free arb.

Okay, so why don't you get some of Venezuela's petrol then?

Maybe Pekelo and I are meaning something different... but I think he was aiming at Mexico's domestic oil/petrol demand versus the exported quantities.... Apparently they only hedged the export, which to me makes sense since that's the bigger income stream if they would underprice the domestic supply.
Of course Mexico doesn't set the international prices... but they can control domestic prices at the pump... by restricting price rises, levies/taxes, etcetc. The fact that they are a producer, means they can.... while countries like Japan are left with whatever the international standard prices are.

And I assume they do control the export price of Maya, since they are the only one selling that type? But they are restricted by the price of better quality Brent/WTI... so they need to sell at lower prices for refineries to make money on it, right?

Australian is pretty crap I think... dirtier than US....

Maybe we're missing each others point. Crude and pump....

 

[OddTrader]

Here is a good analysis:

Q

Good work! But "In 2009 oil prices would average less than $55, well below the average price of the options of $70." Mexico's 330 million barrels of puts paid out about $15 per barrel, or $5 billion. But selling oil at $55 per barrel, rather than $128, means that Mexico missed out on $73 per barrel, or $24 billion on 330 million barrels. The hedge was a drop in the barrel, as it were. Wall Street paid Mexico, but Mexico paid the oil market a lot more.

UQ

The article's analysis seems incomplete.

Here are 4 scenarios:

A1. Dropping from (sold futures at) $128 to $55. Buying calls.

The $24B has to first deduct the $2.4B, that means $21.6B as incremental benefit, not $24B. Then a further cost of about (say) $13.6B for buying calls as long hedge, in this case. (based on $11.7B for buying puts) Also cost of futures, say, $4/year or $1.5B.

The final net benefit would be only $5.5B.

A2. Raising from (sold futures at) $128 to $150. Buying calls.

Assuming a gain of $3.6B for the long calls.

The net benefit would be about minus$2.5B.

B1. Dropping from $128 to $70. Buying puts.

The final benefit would be about $3B.

B2. Dropping from $128 to $100. Buying puts.

The net benefit would be about minus$4B. Then a short hedge is better.


Conclusion: No conclusive best option.

Just 10 cents worth for the above calculation.

 

[Pekelo]

To explain the relative high cost of gasoline in Mexico: Their production cost is 10-23 $/barrel, so they are probably exporting the high profit light crude and selling domestic the high cost heavy crude. They could have extra taxes on the gas, like in England, artificially trying to limit gasoline usage.

 

[OddTrader]

According to the above chart, a long period of raising trendy price after the economic crash of 2008 period could graphically indicate a fairly serious problem Mexico had.

How could a country raise oil price during weak economic time? Unreasonable!

 

[TraDaToR]

Can you simply blend heavy with light crude? I thought you had to go through a refining process( I read Oil 101 a long time ago ).

Here is an article about mexican crudes:
http://www.ogj.com/articles/print/volume-98/issue-20/processing/guide-to-world-crudes.html

 

[Maverick74]

To explain the relative high cost of gasoline in Mexico: Their production cost is 10-23 $/barrel, so they are probably exporting the high profit light crude and selling domestic the high cost heavy crude. They could have extra taxes on the gas, like in England, artificially trying to limit gasoline usage.

Incorrect. They are exporting the heavy stuff. Gulf coast refiners are set to refine the heavier crudes. Mexico keeps the light stuff domestically.

 

[Maverick74]

Okay, so why don't you get some of Venezuela's petrol then?

Maybe Pekelo and I are meaning something different... but I think he was aiming at Mexico's domestic oil/petrol demand versus the exported quantities.... Apparently they only hedged the export, which to me makes sense since that's the bigger income stream if they would underprice the domestic supply.
Of course Mexico doesn't set the international prices... but they can control domestic prices at the pump... by restricting price rises, levies/taxes, etcetc. The fact that they are a producer, means they can.... while countries like Japan are left with whatever the international standard prices are.

And I assume they do control the export price of Maya, since they are the only one selling that type? But they are restricted by the price of better quality Brent/WTI... so they need to sell at lower prices for refineries to make money on it, right?

Australian is pretty crap I think... dirtier than US....

Maybe we're missing each others point. Crude and pump....

Venezuela has shit oil. Literally. Very few refiners in the world can do anything with it. Very heavy, very dirty. High Sulfur. Again, they are not hedging the exported oil as it's the same thing. They are simply hedging their production. They don't control domestic prices at the pump and neither do we. The refined product, gasoline, is a market determined price. The fact that they are a producer means nothing. The US is now the largest producer in the world, we still have a free market (relatively free) market. And no they do not control the export price of maya. Guys look, all these products are fungible. You can buy and sell them, refine them, transform them into other products. Arbitrage pulls the prices in line. THIS is what oil trading companies do like Glencore, Vitol, Trafigura, etc. They do this all over the world. The source cheap oil, ship it, store it, transform it into whatever the highest yielding product is and sell it. If some country is selling some grade of oil under market I assure Glencore will buy it and buy it in size.