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Thursday, December 10, 2009 3:34 PM

Mexico has allocated $1.2 billion to an options strategy that will protect it if oil drops below $57 a barrel.

Mexico bought put options, giving it the right – but not the obligation – to sell oil at that price next year, the Finance Ministry said in a statement.

The $57 level represents a 20 percent decline from current levels.

“We want this as an insurance policy,” said Finance Minister Agustin Carstens, according to Bloomberg. “If we don’t collect any resources from this transaction, it’s OK, because that means oil would have been above $57 a barrel.”

The oil price decline since the middle of last year and a plunge in production at Mexico’s state-owned oil company, Petroleos Mexicanos, cost the country $23.3 billion of oil revenue this year, Bloomberg reports.

Pemex accounts for about 40 percent of the government’s revenue. In November, Fitch Ratings cut Mexico’s credit rating to BBB, the second-lowest investment grade level.

Fitch made the move because Mexico’s budget deficit has exploded to a 20-year high, thanks largely to the decrease in oil revenue.

This year Mexico has made $5.1 billion hedging oil at $70 per barrel, the Finance Ministry said.

If Deutsche Bank’s crystal ball is accurate, Mexico won’t have to worry about exercising its options next year.

The bank predicts that oil prices will average $65 next year, with a possible low of $60.

And if oil legend T. Boone Pickens is accurate, an upgrade may be in store for Mexico’s credit rating.

He forecast at a recent conference that oil will rise to $100 next year, as global production is “maxed out” at 85 million barrels a day.

Earlier this week, veteran Wall Street economist Henry Kaufman warned that a bubble has formed in commodities as "speculative fervor" returns to markets after the global financial crisis.

"There are bubbles in commodities," and probably in the gold market as well, Kaufman, president of financial consulting firm Henry Kaufman & Co Inc in New York, told the Reuters Investment Outlook Summit in New York. He cited the return of leveraged bets as one driver.

The U.S. Energy Information Administration also has slashed its forecast for global oil demand in 2010, citing a weaker-than-expected economic recovery from major crude consumers, such as the United States.

World oil consumption next year is now expected to increase 1.1 million barrels per day to 85.22 million barrels a day. In November, the agency thought global petroleum consumption would grow 1.26 million barrels a day to 85.40 million barrels a day.

source HERE