Not a killing. Only 25% of Mexico's oil production was hedged. So we're still losing ton of money on the other 75%, since oil is one of the main revenues of the Mexican goverment.

It's just insurance so when the prices crash the country doesn't go with it. Since no insurance company in the world can insure even a small govt, the only way to go for it is with financial instruments.

We rather lose a bit of money during the good times and not get wiped during the bad times.

It also seems Hacienda is quite decent at reading the markets from the article, I didn't know as much.

But they do have a special advantage right now simply because their hedge removes a lot of the pressure they would get right now from the low prices. They have less incentives to cut production right now because they have hedged their output for a while so they can't be pressured as much at the negotiation table. Why would they want higher prices in the short term when it will only be at their disadvantage because even a huge production cut would not drive prices above the strike price of their puts anyways. It would only favor unhedged producers.

Also, It doesn't matter if their hedge costs as much as what it earns them over the years, the advantage they have right now is still real. And while yes, hedging is a common form of insurance in the oil industry, I don't know of any other oil producing state that hedges so much of their production.

So what I meant in my comment is that the revenue stability they have right now but other oil producers don't gives them an outsized negotiating power versus a country like for example Angola, that really cannot afford to not cut production if the Saudis demand it.

Actually Mexico does a bit of a bet on these hedges and ends up in a better position than if they hadn't done them year after year with very few exceptions. They have advantages in information. Mexico's hedge is very unique and they're about the only country that does this on net advantage to themselves and hedges their entire oil output.

Unless them producing more drives the payout on the puts up more than what they pay for production (minus world prices).

Oh, and of course, this is all politics. They are not just maximizing profits, but they also have to worry about the optics of firing redundant workers, if they stop production.