Cratering oil price puts Mexico’s Pemex, govt in deep trouble

March’s oil price crash has been uniquely harmful to Mexico’s primary crude export blend, which is sinking to around US$10/b.

On March 30 the blend registered its lowest price (US$10.37/b) since 1999, while this time last year it fetched about US$61.20/b.

“There is an excess of oil on the market,” Gabriella Siler, director of Banco Base, said. And this was even the case before the steep sell-off.

“To this added the possibility that the market is flooded before there is finalization of an agreement between OPEC and its allies [OPEC+] in the price war between Saudi Arabia and Russia,” news outlet Milenio quoted Siler as saying.

The Mexican blend’s price has dropped by over 70% in recent weeks, amid the spread of the coronavirus and an oil price war launched by Saudi Arabia against Russia, the world’s second and third largest crude producers.

Despite tentative signs that some countries are recovering from the coronavirus, recent announcements of lockdown extensions and states of emergency until April 30 in the US and elsewhere have led to even less expected demand for crude, driving the price of the Mexican blend lower.

Also called Maya, the blend is a heavyweight crude that contains more than 3% sulfur, making it particularly suitable for industrial uses - and also vulnerable to a slowdown in construction business plans.

State oil company Pemex counts on exports of the fuel as a principal source of its revenue, and the finance ministry (SHCP) counts on sales to fund a portion of the federal budget, as it also relies on Pemex as the country’s largest taxpayer.

As a result of Mexico’s reliance on fuel exports, investors have sold its currency, causing the peso to weaken significantly.

Now, the inability to generate sufficient dollars through exports is causing fears that Mexico and other countries could be nearing a liquidity crunch.

On Tuesday, private business lobby CCE asked the government to ease liquidity.

Separately, to inject liquidity globally, the US Federal Reserve just unveiled a plan to dollar swap with other select central banks and finance ministries, including US$60bn in access for Mexico’s Banxico and SHCP.

Banxico is expected to tap US$5bn soon, returning the funds in 84 days.

The weak peso, combined with oil demand in the doldrums, paints a calamitous picture for Pemex and Mexico if the country’s export crude stays at current levels.