Mexico’s plan to halt crude exports by 2023 could reduce the size of its giant oil cover and help push prices up in the longer term.
Every year, Mexico participates in one of the oil market’s largest and most covert deals, freezing the prices of its net exports. Trade effectively makes Mexico’s finance ministry one of the biggest sellers of oil contracts for the next 12 months.
But last week, state-owned oil company Petroleos Mexicanos announced it would cut its exports by more than half in 2022 and stop them all together next year. Even if the plan for self-sufficient fuel production fails, a willingness to reduce exports will likely mean smaller coverage in the future. This in turn would reduce the volume of petroleum derivatives that Mexico sells in the coming years.
“If this turns out to be true, it will take out one of the biggest sellers of crude back-end,” said Thibaut Remoundos, founder of Commodities Trading Corporation, who advises on hedging strategies. Overall, that would make the bullish move for crude prices longer term, he said.
Producers like Mexico serve as a natural ceiling for prices in the last few months of the futures curve, as they are sellers and seek insurance in case oil prices fall. Without it, the futures curve could be more sensitive to price spikes, traders and analysts said.
Mexico’s export target is ambitious. The Latin American country lacks the processing capacity to convert its crude oil into refined products, meaning that a complete halt in exports would be a major surprise. Crude production, however, has fallen sharply over the past five years, suggesting that a smaller volume of exports will need to be covered.
If hedging were to stop completely, it would have a significant impact on the options market, traders and dealers said. For example, buying put options – which give the holder the right to sell at a predetermined price and time – is a popular way for producers, including Mexico, to hedge their production. This generally makes puts more attractive than bullish calls. But Mexico’s absence could upend the market and reduce the value of those options.
Mexico’s finance ministry covered a price range of around $ 60 to $ 65 a barrel for 2022 in early November, people familiar with the matter said at the time. Pemex has separate, smaller coverage and data on oil options suggests the company was recently active.
The finance ministry did not immediately respond to a request for comment on the story.
In the past, Ministry of Finance coverage has been very cost effective. The ministry made $ 2.38 billion in 2020, the year oil prices collapsed, and over $ 6 billion in 2016. It also has the potential to disrupt the oil market when prices drop sharply, like the $ 10 drop in November of last year.