Negative oil prices pile pressure on Pemex

Mexico’s benchmark export crude price fell to negative US$2.37/b as of Tuesday, a brief but ominous sign for national oil company Pemex.

“We have insurance, in Pemex’s case not for all of its production, but for an important percentage. And in the case of finance it is 100%,” President Andrés Manuel López Obrador (AMLO) said in a press conference on Tuesday. 

“That’s why one can say that the Mexican people are going to move forward.”

Mexico’s budget relies on oil revenue for about 15% of revenue, a vulnerability that the finance ministry (SHCP) has sought to limit by taking out expensive hedging contracts annually since 2001. 

In January, SHCP disclosed that it spent almost US$1.4bn in hedge contracts to give it the right to sell oil at US$49/b, a move that as AMLO said will protect the government from having to pay to give away its crude. 

The formula for the Mexican blend, sometimes referred to as Mexican Maya, is 65% based on West Texas Intermediate – which crashed to minus US$37/b on Monday – and 35% on Brent. 

Globally, as oil storage in onshore terminals and in tankers reaches capacity after more than a month of depressed prices, the most recent drop, related to the last day of contracts for May oil deliveries, drove the Mexican blend’s price negative.

But Pemex is probably more exposed than AMLO acknowledged. 

Welligence Energy Analytics thinks the NOC only hedged about 15% of its 2020 production at a price of US$49. 

CEO Octavio Romero said in March that the company had begun receiving compensation by exercising the hedging contracts but that came in the wake of Pemex shocking the energy community by disclosing a US$20bn loss for 2019. 

Now, having exercised a portion of its hedges and global prices still facing downward pressure, Pemex is becoming more exposed than ever.