Not all oil companies are equal when it comes to price collapse damage. Some companies and major national producers around the world have purchased insurance in the form of hedging strategies for just such a collapse in oil prices.

This set of hedging tools allows some companies such as the US Hess Corporation and the British Cairn Energy PLC and countries, including Mexico, to continue selling their oil at significantly higher prices when priced at West Texas Intermediate (WTI) and other global oil companies varieties are in a free-fall situation.

Hedging is not a cure for any pain. It’s complicated and expensive, but for some strategies, it provides some short-term comfort.

Hedging contracts set the price for a given volume of oil that the company plans to deliver within a specified period, often after a full three years from the date of the contract. If market prices fall below the agreed price, the bank or other hedging counterparty agrees to cover the difference.

This can be a risky chess move as hedges (an individual or a company planning to own an asset, looking to control the risk of a price change) are paying banks and oil companies to isolate their prices against fluctuations in the market – and they can lose money when prices jump.

While the Organization of the Petroleum Exporting Countries (OPEC) has finalized a historic deal with Russia, the US, and other major oil powers, Mexico nearly failed the deal, opposing cartel requests to urgently curb production. Unlike other negotiating countries, Mexico is actually benefiting from the direction in which oil prices move during the pandemic.

According to the deal, Riyadh, Moscow, and Washington agree to lead the coalition to maintain a cut in oil production of 13% of global supply. Mexico eventually decided to join after a telephone conversation between the country’s president and Donald Trump. However, the pact failed to balance the market, fueling prices, as the coronavirus pandemic continues to stifle demand.

Last week, on Monday, futures contracts for US oil delivery in May ended trading in negative territory – minus 37.63 USD per barrel.

This in effect meant that sellers had to pay buyers to sell them excess quantities.

Mexico’s hedging allows it to sell oil at 49 USD per barrel. The trade, called Hacienda Hedge, dates back to the 1990s, helping to isolate government budgets from fluctuations in commodity markets. In the past, the Mexican government paid 1 billion USD annually for options contracted with banks and oil companies. President Andres Manuel Lopez Obrador said Wednesday (April 22) that the hedging will allow the country to earn 6.2 billion USD.

In recent years, the Iraqi State Organization for Oil Marketing (SOMO) and the United Arab Emirates (UAE) Abu Dhabi National Oil were considering hedging, but abandoned the idea, hoping that oil prices were moving toward sustained growth.

The practice is common among independent oil producers in North America. These companies do not enjoy the financial cushion that most major oil companies have, and usually rely on high prices to continue pumping oil.

One-third of North American oil exploration and production operations are hedged at an estimated sale price of 52 USD per barrel, according to IHS Markit.

New York-based Hess Corp says it has hedged about 80% of its oil production, with most of it being “insured” at 55 USD per barrel.

Laredo Petroleum and SM Energy said their production was hedged at WTI prices of 59 USD per barrel and 36 USD per barrel respectively. At the same time, Antero Resources has protected most of its production and has recently said it will reduce costs by 13% while maintaining its US and Canadian manufacturing guidelines.

Southwestern Energy, another hedging company, recently predicts its oil production will grow 25% this year.

Cairn Energy states that it will be able to maintain production in the North Sea up to 23,000 barrels per day after hedging production at 62 USD per barrel.

Now, hedging is virtually unavailable for companies seeking to mitigate losses from the price crash. “Changing the downward curve and increasing volatility will make it difficult to hedge by the end of 2020”, stated IHS.