Colombia plans Mexico-style oil hedge after recent volatility

Mexico pocketed a record payout of $6.4 billion after crude prices crashed. For next year, the country has already spent $1.2 billion on hedging. Oil capped its worst month in more than two years as concerns mount that the global economy will slow down. Colombia is planning to hedge its oil exports to protect the government from the violent swings in revenue it suffered in recent years. The bill needs to be passed by Congress to become law, and would take effect on Jan. 1. The fund can’t issue debt, and the nature of hedging operations means that losses are possible, according to the bill. Oil has rebounded from 12-year lows of under $30 per barrel in 2016. Even after a 10 percent slump this week, it still closed at just over $59.. Mexico buys options which gives it the right to sell oil at a certain price, protecting the country from a sudden price drop. In 2015.

Colombia is drawing up plans to hedge against declines in the price of crude, its main export, the country’s finance minister said on Friday, following in the footsteps of Mexico, which successfully used one during the 2014-2016 price slump. Mauricio Cardenas said “it is the right time” for Colombia to start thinking about implementing an oil hedge for the first time, adding that the country would need to reshape its legal framework to allow the government to lead a potentially risky financial transaction. “Colombia needs to do something like what Mexico has (done),” Cardenas told Reuters in an interview in New York. “As oil prices recover and seem to be higher now than what they probably will be in the long term, this would be the right time to hedge.” Colombia once earned roughly a fifth of its national income from oil revenues, royalties and taxation, but that figure fell to nearly zero during the global decline in crude prices in 2014. The country would need to change its laws to remove liability from public officials as they carry out those hedges, which could run into controversy in Congress, especially in an election year.

There’s a sense that the global economy goes into a bit of a slowdown and demand in 2019 isn’t quite as robust as it has been over the past couple years,” said Brian Kessens, who helps manage $16 billion in energy assets at Tortoise in Leawood, Kan. “We are still in more of a risk-off sentiment.” On top of demand concerns, all eyes are on any impact from Iranian sanctions that are set to kick in on Nov. 4, with many taking a view that Saudi Arabia and OPEC will pump enough to fill any supply shortages. “We’re right on the cusp of iran sanctions taking full effect. They may be able to get more barrels to the market in a more clandestine fashion, but that’s a wait-and-see,” said Stewart Glickman, an energy equity analyst at CFRA Research. “On the demand side, there are macro fears and this is a reasonable factor to be worried about. You have the potential for a recession that would eat into GDP, and of course, GDP and global oil demand are pretty well-correlated. The government of President Ivan Duque, which took office in August, has a strong alliance to get laws through Congress.

Colombians will elect a new Congress in March and a four-year president in May. President Juan Manuel Santos is serving his second term and is not allowed to run again. The recovery in oil prices has filled the coffers of Colombia’s state-controlled oil company Ecopetrol, which over the last year has reduced its external debt by $3 billion to $15 billion, according to Cardenas. The minister said Ecopetrol has between $4 billion and $5 billion in cash in hand that could be used for additional repayment of external debt. The company’s results, due out in coming weeks, will positively surprise markets in terms of dividends and revenues to the Colombian government, Cardenas said. Cardenas said he wants to start the creation of a legal framework “so that in the future hedging becomes the norm, not the exception. In the past, Colombian governments have been deterred from operations of this kind for fear of being accused of causing losses to the nation, Perez said.

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