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Global Energy Advisory June 23rd 2017

Global Energy Advisory June 23rd 2017

Mexico’s most recent oil tender…

Pemex Hedges Oil For First Time In 11 Years

Pemex

Mexico’s state oil major has decided to hedge its oil output until the end of the year for the first time since 2006, spending $133.5 million on the maneuver. The hedge will lock in a price of $42 per barrel of Pemex oil for an amount of up to 409,000 barrels per day. The move suggests that Pemex is in the skeptics’ corner of the oil industry – Middle Eastern producers are still hoping to bring prices to $60 a barrel.

The government is also skeptical about international oil price-related efforts. In its budget forecast for the year, the Finance Ministry, which does its own, much larger oil hedge, put in an average oil price for local crude of $42 for 2017 and $46 for 2018. The January 2017 price for Mayan crude for the U.S. was $45.75 a barrel.

Pemex explained in a statement that the hedge will help it protect its balance sheet. The statement also said that “For the first time in 11 years, Pemex has its own hedging program, which will favor the fulfillment of its operational and investment commitments and provide greater certainty to its income considering a possible drop in oil prices.” This reinforces the perception that the Mexican company is not too optimistic about the immediate future of oil prices.

It is certainly not alone in this: pessimism among traders is growing as global crude inventories remain at historic highs. Brent, the international benchmark, has lost 5 percent since early December, when the final OPEC-non-OPEC deal was announced, sending prices to their highest in 2016. Yet, over the first quarter of this year, inventories continued to creep up, despite high compliance levels among OPEC members.

Related: Top 5 Risks To Oil Prices

Analysts argue that until there is a clear sign of falling inventories, prices won’t move from where they are now. For this to happen, however, OPEC may need to cut deeper. As JPMorgan said, quoted by CNBC, the cartel “will be forced to renew, and possibly deepen the agreement if they wish to keep prices much above $50 per barrel.”

By Irina Slav for Oilprice.com

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  • Josh Gregner on April 27 2017 said:
    You write: "Analysts argue that until there is a clear sign of falling inventories, prices won’t move from where they are now. For this to happen, however, OPEC may need to cut deeper." - and pessimists argue that OPEC can't cut much more without risking civil unrest in their countries due to massive state financing deficits and associated cuts to government spending.

    If you couple this necessity to generate oil revenues with falling OECD, lagging Asian demand and no other hope of getting demand up significantly, there is a risk for a perma-glut in oil supply.

    And if a perma-glut is what you are looking at, you may as well sell whatever you have at whatever price you can achieve now - the future will only get worse. And that maybe what we are seeing soon.

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