Mexico: out of the void?

An important oil discovery has fostered market confidence

Leer en Español: México: una luz al final del túnel

Mexican state company Petroleos Mexicanos or Pemex announced its largest mainland discovery in the last 15 years. The Ixachi-1 field is located near Veracruz and is expected to host 1.5 billion barrels of oil. Pemex CEO Jose Antonio González pointed out that infrastructure is already present near the well, so profits will start emerging by the end of 2018 or 2019.

Pemex was founded in 1938 after every private oil company in Mexican territory was expropriated. The president at that time, Lázaro Cárdenas pointed the deep consequences said action would have in Mexico's relationship with the United States in the years to come. Mexico has oil but lacks technology, which is why Pemex made an agreement with Russian Lukoil in 2014, the first deal of its kind for the Mexican government.

Mexico’s oil industry has endured hard times in the last two quarters: production declined substantially in the last 6 months to an average of 1.93 million barrels a day while in July the average was 1.99 million barrels a day. The year to year figure stands 10% below last year’s aggregate. October was the most challenging month in the near past for the Mexican extraction sector, as Hurricane Nate halted 90% of the country’s total oil production for nearly a week

Although petroleum will be replaced, it is still the driving force behind human development. Latin America has faced the fact it did not have a true industrialization cycle, which has earned the sub-continent an edge on the primary sector. Since oil is used in all kinds of products, from asphalt to electricity, fertilizers, medicines, clothing, tires, roofing and safety glass among others, extracting it is still a safe business. Alternatives result costlier as well.

Brazil is the largest oil producer in Latin America, and Mexico is second. Brazil’s core extraction method is deep-water field extraction, which generates around 2.5 million barrels a day. The South American nation expects to produce 4 million barrels a day by 2022. The regional lead in the oil industry belongs to Petroleo Brasileiro S.A, Petrobras, responsible for 72% of the nation’s total output.

Good for all

2018 seems bright for Latin America as oil prices are expected to rise. The U.S. oil exports have reached records of 1.9 million barrels a day, which have strongly contributed to the 120 million barrel loss on its reserves every 26 weeks as of October 2017. American oil inventories correlate to the yield curve.

In the other hand, OECD’s inventories have decreased 99 million barrels in a 2 month span. Although Venezuela still has the largest oil reserves, its output remains in the same levels of 1991 without signs of improvement as rising debts indicate the sale of assets rather than investment for better equipment.

Reuters revealed that interest for $100 oil call options exceeded in the last week of September, adding up to 30,000 lots. The most attractive contract in the market is a 60 dollar call option for oil. A call option grants the alternative to buy or not a barrel of oil for an agreed price at an agreed date in the future at a price averaging 5-10 dollars. Options are executed in the event oil costs in the strike date, so profits can be made.


Latin American Post | David Eduardo Rodríguez Acevedo

Copy edited by Laura Rocha Rueda

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