Mexico Oil Hedging gives Pemex and Mexico some protection against this drop in oil prices.
Mexico usually hedges about 1/3 to 1/2 half of the years oil production at a cost of about $1.2 billion. The hedge for 2020 was at U.S $49.00 per barrel. The hedge itself costs about $4.00 per barrel. As a result, anything below U.S. $45.00 per barrel is costing the hedging banks, not Pemex or Mexico. However it could still spell financial disaster for Pemex if the price stays down. No one has reported on how much production Mexico hedged this year. At most, half of their production would be somewhat protected. Mexico hedged a blend of oils, from heavy to lighter so it is hard to determine what will be the loss for Pemex and Mexico. Last years average price for crude was around the hedge price, so Mexico averaged around the $55-$57.00 per barrel. Mexico will have forward sold some oil and so this drop may not be impacting Pemex yet, but will have a significant impact this quarter and a major impact on next quarter earnings in a huge way. There are so many variables. But this massive oil price drop, even if protected by hedging will cost Pemex at least U.S.$10.00 per barrel compared to last year. A $10.00 per barrel drop will cost Pemex at least U.S.$ 6.5 billion off its revenue, even if oil prices recover to $45.00 per barrel average over the year.
Since most off Pemex costs are fixed, and it lost $18.8 billion last year it will be interesting to see how it handle this huge drop in revenue?
So what will this drop do to the Government’s (or should I say, Nahle and Amlo’s) thought process.
The exchange rate drop in the peso could cost Pemex and Mexico more than the oil price drop. The following article from the Yucatan times is interesting.
https://www.theyucatantimes.com/2020/03/the-mexican-peso-fell/
Andrs Manuel Lpez Obrador always used the strength of the Mexican peso as a shield; he wrapped himself in its apparent immunity. When questioned about the poor performance of the Mexican economy, he would deflect the conversation and brag about the good performance of the national currency; it was his recurrent ace up his sleeve. So, until yesterday.
The peso resisted epically but succumbed to the onslaughts of the international markets, specifically the Persians, who are disrupting the markets by launching an oil price war against their former ally, Russia. That and the coronavirus.
Lopez Obrador, like a pathetic King Leonidas, is confined to a cheap patriotism. He chose to turn his back on the world, a stance that will now take its toll; his particular Thermopylae had to fall sooner or later, so announced the logic of history and strategy; only he was clinging to the miracle of his naivety.
According to “El Financiero,” the Mexican currency sank by up to 8.9 percent against the dollar on Monday, in line with other currencies of emerging countries. According to the Bloomberg agency, the price of the U.S. currency was at 21 pesos at 22:00 on the electronic markets, a level not recorded since January 2017.
This implied an increase of 4.6 percent compared to Friday, equivalent to 92 cents more. However, in the early hours of the day, the dollar reached a high of 21,906 pesos, representing a rise of 1.8 pesos, equivalent to depreciation for the peso of 8.9 percent.
Lpez Obrador was caught in the financial storm like the “Santa Julia Tiger”… with his pants down; the weight of his pride, as he has shown, will prevent him from coming out of his self-absorption.