Mexico hedges against oil price slide Mexico has bought protection against the impact of the global economic slowdown, in effect insuring its crude oil exports at about $80-$85 a barrel for next year. But for the first time since the Latin American country started to hedge its oil exports in the early 1990s through derivatives contracts, Mexico has engineered a series of contracts that means the country would be partly exposed to low oil prices if the West Texas Intermediate benchmark dropped much below $60 in 2013. Mexico has traditionally spent large amounts of money buying put options, contracts giving the right to sell at a predetermined price at a specified time. But market participants told the Financial Times that the country has also bought some so-called put-spreads for 2013. The financial structure provides Mexico with protection against prices dropping to a certain level, in this case $80-$85, but partly exposes it if prices drop beyond another point, in this case roughly $60 a barrel. "Mexico in effect is saying that oil prices could not drop for any sustained period below the $60 a barrel level because some producers would cut output," a senior commodities banker said. The hedge is more sophisticated than in the past. Oil prices fell below $60 a barrel in late 2008 and early 2009 for five months, but recovered quickly after cutbacks by the Opec oil cartel and Canadian producers. WTI averaged $62.1 a barrel in 2009 despite the financial crisis. Since then, Saudi Arabia, the world's largest oil producer, has stated it aims to keep oil prices about $100 a barrel on average to satisfy its growing budgetary needs. The complicated structure makes it more difficult to estimate the exposure of Mexico to ultra-low oil prices. But traders said the country was relatively well protected. The Mexican hedging programme often moves prices as banks offload the risk into the market. Oil traders and bankers said the implementation of the programme contributed to the sudden drop in oil prices last week, when WTI crude tumbled nearly 5 per cent in a few minutes, apparently inexplicably. Mexico's oil hedging programme is the largest single annual deal in the commodities market, which eagerly awaits the details each year. The country has been carrying out similar hedging on its oil production since 1991. Oil options traders and brokers said Goldman Sachs, JPMorgan and Deutsche Bank carried out the bulk of the operation. Barclays, which in past years had led the deal, did not participate in the 2013 hedge, traders and brokers said. The use of put-spread structures means that Mexico has lowered significantly the cost of its hedging programme. In the past, the country has spent between $1bn and $1.5bn a year, but market participants believe Mexico's total cost will be about half that for 2013. "Mexico is willing to take some price risk in order to make the overall deal cheaper," said a veteran commodities watcher. Miguel Messmacher, chief economist at Mexico's ministry of finance, earlier this year said the country had hedged its oil exports for 2012, amounting to 211m barrels - about 580,000 barrels a day - at $85 a barrel. Oil options traders and bankers said Mexico had hedged about 200m barrels for 2013. Goldman Sachs, JPMorgan, Deutsche Bank and Barclays all declined to comment. Mexico's ministry of finance did not immediately respond to a request for comment.