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By Anthony Esposito, Stefanie Eschenbacher and Devika Krishna Kumar
July 12 (Reuters) - Mexico has finished calibrating the formula used as a basis for its massive oil hedging program, a finance ministry official said on Friday, clearing a major obstacle for the hedge, the world’s largest and most secretive Wall Street oil trade.
Mexico buys as much as $1 billion worth of financial derivatives in order to protect its oil-sales revenue for the coming year against price volatility, in a highly anticipated financial trade that can make or break an investment bank’s deal book.
The formula is one of the last pieces Mexico needed to approach banks to solicit quotes for the crude oil options it typically buys to protect against a drop in oil prices, sources familiar with the deal said in late June.
Mexico had faced challenges in executing the hedge this year as oil prices have been volatile and new International Maritime Organization standards set to come into effect in 2020 have roiled fuel oil markets.
“On the back of the changes in the maritime rules for the use of fuels, Pemex updated (the formula), trying to include more liquid mixes that could help better model the Mexican mix,” said Gabriel Yorio, a senior finance ministry official. “Those changes have already been done ... (the formula) is ready.”
High-sulfur fuel oil has generally been a component of Mexico’s export mix. Brokers and traders have asked the country to replace the type of heavy fuel oil it has been using for calculating the formula for the hedge, Wall Street sources said, because beginning next year, tankers can no longer use that fuel, which is a heavy pollutant. (Reporting by Anthony Esposito and Stefanie Eschenbacher in Mexico City; Devika Krishna Kumar in New York; additional reporting by Adriana Barrera and Marianna Parraga in Mexico City Editing by Marguerita Choy)