October 21, 2019 [Financial Post] – Mexico’s new crude oil formulas that underpin its export sales and oil hedging program highlight the growing reach of U.S. crude exports and Mexico’s decision to rely on more liquid, heavily-traded international contracts.

 
The nation’s state-run energy company Pemex late Thursday released details of how it will calculate its formula to hedge against upcoming sales of Maya crude, its flagship grade. The finance ministry worked in tandem with Pemex to simplify the crude sales formulas – eliminating a number of different components it has used in the past.

Pemex sets formulas that dictate the price at which Mexico’s crude is sold worldwide. A top finance ministry official told Reuters the formula’s structure had not been changed in two decades.

Now, the formula’s biggest component for pricing sales of Maya exported to the U.S. Gulf Coast will be U.S. West Texas Intermediate delivered to East Houston (MEH), rather than a number of other grades of oil. Reuters reported last month that the energy ministry had included the popular U.S. export grade.

Houston is swiftly catching up to Cushing, Oklahoma as a key barometer for the health of U.S. crude supply as U.S. crude exports have surged to a record above 3 million barrels per day (bpd).

The new formulas also replace dated Brent, which is considered the benchmark assessment of the price of physical, light North Sea crude oil, with the more liquid Intercontinental Exchange Brent for Maya sales to the Americas, Europe, India and the Middle East. ICE Brent is one of the most actively traded futures contracts on that exchange.

“The new formula will be much easer to hedge as there’s much more liquidity and transparency. Maya crude hedge risk has been simplified into WTI-Brent spread, which has been minimal and continues to contract,” said Ryan Dusek, director at Opportune LLP’s commodity risk advisory practice.

The last major change to the formulas involve cutting out exports of high-sulfur fuel oil, which has historically been a component of Mexico’s exports but is set to be banned next year due to high emissions. The new formulas are set to take effect from December.

The current formula for Maya crude sales to the Gulf Coast includes two U.S. crude grades, Louisiana Light Sweet (LLS) and West Texas Sour (WTS), along with U.S. Gulf Coast high sulfur fuel oil. Those are being removed.

Mexico’s sales to Europe, India and the Middle East will no longer include fuel oil either.

High sulfur fuel oil is one of the dirtiest and cheapest products to come out of a refinery and has been the fuel of choice in global shipping for decades. Shipping demand is expected to evaporate after new International Maritime Organization (IMO) rules take effect on Jan. 1.

Pemex cited changes in global environmental regulations and heightened volatility in components of the formula as the reason for the overhaul.

————-