A Perfect Storm For PEMEX?By Peter Appleby | Mon, 04/20/2020 - 13:26
On Friday, Moody’s downgraded PEMEX’s bond ratings, which are now considered junk. Meanwhile, the US’ benchmark WTI crude mix is facing its lowest price in 20 years, a potential signal of what is to come for global oil prices. Mexico has an additional problem as it is reaching its oil storage limit, as reported by Bloomberg. This brings Mexico’s oil and gas industry to the most crucial moment it has faced in the COVID-19 pandemic thus far.
The litany of downgrades handed out to PEMEX by Moody’s has placed the NOC in an insecure financial position as it is now considered below investment grade. Among the cuts was the NOC’s senior unsecured ratings (Ba2 from Baa3), the withdrawal of the issuer rating (Ba2 corporate family rating from Baa3) and the lowering of its Baseline Credit Assessment (to caa2 from caa1).
Justifying the decision, the agency said that “PEMEX's Ba2 corporate family rating and caa2 BCA reflect the company's high vulnerability to low commodities prices given its fragile liquidity position and excessive debt burden.”
Nymia Almeida, Moody's Senior Vice President, also highlighted the company’s inherent connection to the Mexican federal government as one of the reasons behind the downgrade. “We downgraded PEMEX's ratings and maintained the negative outlook on its ratings following the downgrade of Mexico's rating and its negative outlook given the critical importance of the government's financial strength and support in the assessment of PEMEX's credit risk,” said Almeida.
Moody’s downgrade was accompanied by a downgrade from Fitch Ratings, which cut the international foreign and local-currency long-term ratings of PEMEX and CFE, Mexico’s state-owned electricity company. The downgrades are the latest in a list of negative decisions that the world’s leading credit agencies have delivered to PEMEX and Mexico and arrives during a particularly fraught time in the oil and gas industry.
The WTI fell to US$10.77 per barrel, its lowest price in 20 years, at the opening of trading on Monday, while the Mexican crude oil basket closed on Friday at US$14.45.
The price collapse has been linked to the world approaching its maximum oil storage limit, a situation that experts have been warning about for weeks. As COVID-19 has spread and both economies and societies have shutdown, demand for fuels has fallen sharply. Despite the OPEC+ 9.7MMb/d production cut agreement that comes into effect May 1, prices have continued to tumble.
PEMEX had previously stated that its 80 storage terminals would provide sufficient capacity for the period of low demand. However, Bloomberg reports that PEMEX’s capacity is already full. According to the news outlet, “as much as 3MMb of refined products are sitting in tankers off of Mexico’s coast.”
The world’s wet freight companies have seen prices rocket in recent months as storage capacity has been reached on land. Though prices were highest in Asia and the Middle East, vessels in Latin America could now see a similar rate rise.
The federal government’s decision to reduce exports by 33 percent (some 800Mb/d) now seems short sighted. Unless Mexican production is reduced at a greater rate than 100Mb/d – something the government was unwilling to do in the recent OPEC+ meeting – storage may be reached in the country soon. When that happens, negative pricing is possible.