Page 5 - LatAmOil Week 16 2020

LatAmOil COMMENTARY LatAmOil
 Pemex downgrade
The news that Mexican crude prices had sunk below zero came just a few days after Moody’s Investors Services, one of the world’s top three credit ratings agencies, revealed that it had downgraded bonds issued by the national oil company (NOC) Pemex to junk status. In a statement explaining this move, the agency pointed out that Pemex suffered from “high vulnerability to low commodities prices, given its fragile liquidity position and excessive debt burden.”
Nymia Almeida, Moody’s senior vice-presi- dent, said Pemex needed to do more than prom- ise budget cuts. The agency’s decision to take the company’s bonds out of the investment-grade category “took [into] consideration our expec- tations for an extended period of negative free cash flow and the need for external funding, despite the company’s efforts to adjust costs and investments to low oil prices,” she said.
John Padilla, the managing director of the IPD Latin America consultancy, said the down- grade would limit Pemex’s ability to secure nec- essary financing. This is worrisome, given that the company is already the most indebted oil operator in the world.
No immunity
This heavy debt portfolio does not seem to have fazed Mexican President Andres Manuel Lopez Obrador, who has argued that the NOC’s best option is to turn inward, increasing its own pro- duction (preferably with the help of local com- panies rather than foreign contractors) and then directing more oil to domestic refiners in order to shore up its own finances.
Likewise, Lopez Obrador’s government has played up the idea that Mexico is immune to some degree from global economic and social turmoil. Last month, the president himself dis- dained calls for social distancing as a means of slowing the spread of coronavirus and has con- tinued to press the flesh at public rallies. And
earlier in April, government officials voiced confidence about the country’s ability to weather low oil prices, painting the decision to hedge a large portion of Mexico’s oil production at a price of $49 per barrel as a harbinger of good fortune.
The crash in oil prices may be forcing some changes, though. On April 21, Lopez Obrador told reporters that Pemex would have to stop production at some of its newest oil wells. He justified the decision by noting that shutting downolderfieldswouldleadtodifficultiesinthe future, explaining that the process of bringing mature reservoirs back online was more com- plicated and expensive.
It is worth noting, though, that this decision will probably have the effect of bringing Mexi- co’s oil output down. This is exactly what Lopez Obrador’s administration has tried to avoid, as evidenced by the stance it took during negotia- tions on a new OPEC++ production agreement in the week ending April 12.
Initially, Energy Minister Rocio Nahle brought the talks to a standstill by rejecting the OPEC++ group’s request that Mexico trim yields by 400,000 barrels per day. She countered with the assertion that that her country would not take more than 100,000 bpd off the market.
Nahle won the battle, in the sense that OPEC++ agreed to accept this figure. The group let Mexico reduce production by just 100,000 bpd, thereby ensuring that its new agreement trimmed output by 9.7mn bpd instead of the more symbolic figure of 10mn bpd.
Nevertheless, the war is not over. The oil market’s collapse looks set to bring Mexican oil output down anyway, despite the government’s best efforts, and Lopez Obrador has pledged to increase budget spending by around $26bn this year in order to mitigate the economic impact of the pandemic. He is likely to find this a difficult task, given that falling production will reduce oil revenues, even with the shrewdest of Hacienda Hedges in place. ™
“ collapse looks
Examining the WTI collapse
WTI’s unprecedented crash into negative territory illustrates an oversupply crisis as storage fills up
WHAT:
WTI prices fell into negative territory, settling at -$37.63 per barrel on April 20.
(continued next page)
US oil prices have recovered slightly from an unprecedented fall into negative territory on April 20, but West Texas Intermediate (WTI) continues to trade at lows not seen since 1986 amid warnings that the crisis is set to worsen. In the April 20 crash, WTI crude futures for May delivery plummeted 305% to settle at -$37.63 compared with $18.27 on April 17 – the previ- ous day of trading, as April 20 fell on a Monday.
The collapse has been primarily attributed to
the mechanics of futures contracts as the May contract came up for expiry on April 21. Despite some recovery, the new front month contract for June is also taking a hit, and other benchmarks, including Brent, are also feeling the impact.
With none of the issues that precipitated the crash likely to be resolved anytime soon, the April 20 collapse is now being held up as a sign of much worse to come as remaining available oil storage capacity fills up.
The oil market’s
set to bring Mexican output down, despite the government’s best efforts
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Week 16 23•April•2020 w w w . N E W S B A S E . c o m
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