Will Mexico’s Crude Basket Price Fall Further?

The worldwide price collapse that led to the Mexican crude oil basket losing 20.3 percent of its price on Monday and closing at a 21-year low of US$10.37 per barrel could continue and, in the worst scenario, end in a negative price range, experts are suggesting.

El Economista reports the basket’s closing price on Monday meant that it had shed 82 percent of its value since January 2 of this year. According to Banco de México figures published in Reforma, this is the lowest price recorded since March 11, 1999. This has been driven by the flooding of the oil market by Saudi Arabia and its allies in a spiraling price war with Russia, as the two heavyweights seek to gain a competitive edge in one of the world’s most profitable industries. The situation has been aggravated by the disastrous impact of the COVID-19 pandemic, which has seen the worldwide demand for oil drop by 20MMb/d according to the Executive Director of the International Energy Agency, Fatih Birol.

Will this price fall continue? According to Business Insider, Saudi Arabia’s Saudi Aramco is considering selling its pipeline business to secure cash against what looks likely to be a prolonged price war, while also preparing to offer the largest discount on its flagship crude mix in two decades. All of this, while the company persists with its plan to increase exports to 10.6MMb/d in May. Meanwhile, US President Donald Trump has begun talks with Russia’s President Vladimir Putin over the price collapse worries, though little progress has yet been made. At present, there appears to be way to stop prices decreasing further.

Arturo Carranza, energy industry consultant, told El Financiero television that “it is not an exaggeration to think that the value of the Mexican mix could reach negative levels” if there is no international agreement to resolve the price crisis. The basket’s low price is already having an impact on PEMEX, which according to Reforma, produced a barrel of oil at an average price of US$14.02 during 2019. Reaching negative price levels would have a significant impact on Mexico’s public finances.

PEMEX’s reported 4 percent production drop, alongside a drop in refining capacity, appears to follow the prediction made by IHS Markit today, in which the industry consultancy said it “expects up to 10MMb/d of world oil production will be cut or shut-in from April to June 2020, as oil storage fills up and output from financially strapped companies begins to fall.”

PEMEX may consider suspending some of its low yield or more costly wells, should the Mexican oil basket’s value drop further. With worldwide storage reaching capacity, the NOC must act soon to confront the crisis.