Pemex: Mexico Will Eliminate Fuel Oil From Crude Oil Price Formula

Mexico is working on a new formula to fix the price of crude oil in order to take into account the upcoming regulation on fuel oil, which will affect your billions of dollars of oil cover, considered the largest oil operation on Wall Street.

The national oil company Petróleos Mexicanos collaborates with the country's finance ministry to complete the formula, Octavio Romero said in an interview.

Currently, Mexico sells its Maya crude using a price formula that takes into account the value of oil in the United States and fuel oil. In turn, the country of Latin America buy put options Wall Street banks to guarantee or hedge the price of Maya crude oil.

As Maya oil is not a type of oil sold on the financial markets, the banks that sell the options cover their exposure using multiple instruments, included in the fuel oil financial market. The revision of the price formula will lead to a change in the way banks protect themselves, that could affect nominal fuel oil contracts by billions of dollars.

Romero said that they were working with the Ministry of Finance on the definition, including a new formula for the price of oil replacing fuel oil which will be used for coverage. He added that they had been working on it for several weeks and that he was practically ready.

Mexico's annual sovereign oil hedge, the largest of its kind, is considered one of Wall Street's most secretive. historically the finance department bought put options (contracts giving you the right to sell crude oil at a predetermined future price) to a small group of investment banks and oil companies. Negotiations with insurers will begin soon, Romero said.

When asked if Pemex would have its own cover by 2020, Romero said that it was not decided yet.

The decision to eliminate high sulfur fuel oil, of the Mexican crude pricing formula is the result of published IMO 2020 regulations by the International Maritime Organization, which requires ships to use low sulfur fuels from January of next year. Regulation should significantly reduce demand for fuel oilwhich will lead to a significant drop in prices.