PEMEX’s Maya Crude Price Cut Signals Tough Times

PEMEX’s international trading arm, PMI Comercio Internacional (PMI), cut the benchmark price of its Maya Crude by US$2 for April on Friday last week, Bloomberg reported, as the deadly combination of plunging oil prices and reduced demand cut deep into the already struggling company. 

PMI, led by Director Ulises Hernandez, made the decision to cut the per barrel price of its famed heavy sour crude grade in the US Gulf Coast, European, Indian and Middle Eastern markets as producing nations grapple for a position in the troubled global market.

The industry has been rocked by a sharp drop in demand for oil, caused primarily by the COVID-19 pandemic and the subsequent suspension of industry and transport activities across the world. The downward price trend began when China, the world’s largest oil and gas importer, quarantined citizens and shut down factories following the virus’ outbreak in the city of Wuhan. The price plunge escalated as the pandemic spread, with many countries around the world closing their borders to international travel and suspending schools. 

Problems have been further aggravated by the price war between Russia and Saudi Arabia, which erupted after a failed attempt to agree on production cuts to maintain prices ahead of the expected price drop. In mid-March, Saudi Arabia flexed its considerable oil muscle by announcing its NOC, Aramco, would increase daily production to 13MMb/d, intending to flood the market and win the favor of big refiners in Europe and Asia.  

PMI’s move comes in stark contrast to comments made by Mexico's Minister of Finance Arturo Herrera earlier this month and offers an insight into the seriousness of PEMEX’s situation. According to Reuters, Herrera said Mexico would attempt to replicate its mediator role during a 1998 OPEC disagreement, when Mexico – a non-member - persuaded Saudi Arabia and Venezuela to end in-fighting. “Mexico was a country that mediated, which requires certain diplomatic abilities,” said Herrera.

The price reduction is the heaviest PEMEX has offered since the company’s change of its pricing formula, which according to Argus Media is based on a combination of the Argus’ WTI crude Houston assessment, the Ice Brent contract price and Mexico’s K-factor. The Maya Crude’s important benchmark status for other Latin American mixes could result in price changes coming from other producers in the region.

Though PEMEX’s hedging strategy gives the company strong protection against falling oil prices, it is already the most indebted oil company in the world. According to Wood Mackenzie, the country also has the highest average break-even cost per barrel of oil produced in Latin America at US$35, while PEMEX’s extraction cost is reported to be US$14.2 per barrel of crude. Just last week, El Financiero reported that Welligence, an oil and gas market consultancy firm, published a report predicting that only the Xikin and Ixachi fields of PEMEX’s 22 priority fields would not generate a loss for the company if developed, should the price of the Mexican Crude Mix continue below US$20.

PEMEX’s situation appears perilous and Mexico, whose economy is tied so tightly to the health of its oil producer, also faces a grave threat. The historically low value of the peso against the dollar – still at over MX$25 – will add to Mexico’s fiscal troubles and further reduce the attractiveness of the country for outside investment.