The Strategist

Mexico to Axe Oil Production

03/01/2016 - 15:48

Mexico axed its oil production by 100 thousand barrels per day. This is stated in the report of the local oil company Petroleos Mexicanos, also known as Pemex.

Matthew Rutledge via flickr
Matthew Rutledge via flickr
Last year was the worst in the company’s history: the loss amounted to about $ 30 billion. Consequently, the government announced a reduction of expenditures by $ 5.5 billion. This will lead to a drop in production.

Of these, $ 2.58 billion will come from reductions in the area of exploration and production, and about $ 2 billion - in processing. By the way, Pemex suffers losses for 13 consecutive quarters, that is, the last time the company managed to get a profit was in 2012.

It is also worth noting that the company lowered its forecast for oil prices this year from $ 50 to $ 25 per barrel.

Pemex is now ranked 10th in the world in terms of production. Taking into account the reduction, it will produce about 2.1 million barrels per day.

Pemex’s management noted that the company will remain profitable at an oil price of $ 25 per barrel. "It is commendable: there’s not much of oil companies in the world, which possess such quality," - commented the company’s Head José Antonio González Anaya.

At the same time, he acknowledged that the company has some problems with liquidity and financing in the short term.

Thus, it seems that the oil market will gradually eliminate imbalances: now we see a decline in production in the OPEC countries and the United States.

The problem is that as the oil prices rise, the major exporting countries may not increase production, but the US shale sector will do it for sure. Firstly, shale drillers are much more mobile, and introduce wells into operation fairly quickly. Second, it is a private business in the US, and private business will do anything to generate income.

However, it is interesting to watch the dynamics of production in the United States over the past week. If the fall continues, the minimum of the last year will be renewed for sure.

Long positions in Brent are at a maximum of 5 years

In the meantime, speculators seem to be set up for further growth of quotations. According to the latest CFTC’s data, hedge funds in February increased long positions in WTI grade crude oil by 14%. This is a record for the past 3 months.

January’s freeze production plan is beginning to bear fruit. ICE Futures Europe estimated that during this time, the number of long positions in the North Sea Brent increased by 35 thousand pieces, up to 320 thousand contracts, which is the highest peak in the last 5 years.

The joint proposal of Saudi Arabia, Russia, Venezuela and Qatar faced a lot of sarcastic criticism in the media. The ostensible freeze will not give anything because the Russian and the Saudi oil were still out on the record high for the extraction right before the agreement. However, market participants are already beginning to bet on a future shortage of supply and increasing demand.