US, WASHINGTON (ORDO NEWS) — A new deal by OPEC + oil exporters was in the balance because of Mexico, the only country to disagree with the proposed reduction in production. Negotiations with her have been ongoing for the fourth day. The Latin American country has a trump card that allows it to stand its ground against the Saudis: Mexico has insured itself against the collapse of markets and, in any case, will sell its oil at old prices.
The agreement to reduce oil production was in the balance, writes Bloomberg. Negotiations on the deal, which began on Thursday, have been dragging on for the fourth day due to the position of Mexico, not ready to give up.
Saudi Arabia, the de facto leader of OPEC, insists that Mexico reduce its production by 400,000 barrels per day. Mexico only accepts 100,000 barrels. Mexican President Andres Manuel Lopez Obrador, who took office in 2018, began oil reform to increase production, does not support a deeper reduction.
Mexico has a powerful trump card with the Saudis, writes Bloomberg: the Mexican government has insured itself against falling oil prices on Wall Street, which allows it to dictate its terms in negotiations with countries whose incomes have suffered from a collapse in prices.
For 20 years, Mexico has been annually buying put options for oil sales from a small group of investment funds and oil companies. According to Bloomberg, these are the largest and most secret oil deals on Wall Street. Mexico declared these operations a state secret .
Options are the equivalent of an insurance policy. They give Mexico the right to sell its oil at a predetermined price at a specific time. Even if prices collapse, Mexico will receive the amount fixed in the contract. In previous years, hedging has already helped Mexico during crises. In 2009, the country earned $ 5.1 billion in oil exports, in 2015 – $ 6.4 billion, and in 2016 – $ 2.7 billion, the agency said.
In recent years, Mexico has spent about $ 1 billion on the purchase of put options. “Insurance is not cheap,” said Mexican Finance Minister Arturo Herrera on March 10, after a collapse in oil prices. – But this is insurance for such times as now. Our budget will not suffer.”
Mexico stubbornly defends its position in the negotiations, not only because of hedging, Bloomberg points out. “The main reason prompting President Andrés Manuel Lopez Obrador, a leftist populist to resist the deal, is his promise to resume oil production through the state-owned Petroleos Mexicanos (Pemex),” the agency writes.
The rescue plan for the oil industry, presented by Obrador after taking office, suggested that state-owned production would rise from 1.73 million barrels to 2.48 million barrels per day by the end of November 2024. Like the government, Pemex is also insured against falling prices. In 2020, the company hedged the sale of 234,000 barrels of daily oil production at a price of $ 49 per barrel, Bloomberg points out.
Therefore, the proposed decrease in production of 400,000 barrels under the new OPEC + agreement will significantly reduce the profit of the Mexican company. According to estimates by Bloomberg analysts, if the current low Mexican oil prices continue until the end of November, Mexico will earn about $ 6 billion on hedging. The agency indicates that representatives of the country’s Ministry of Finance and the Ministry of Energy declined to comment.
Negotiations with Saudi Arabia
On Saturday, April 11, the Saudi state oil company Saudi Aramco once again postponed the announcement of its oil prices in May. Sources of Bloomberg reported that this is due to the fact that the kingdom continues to negotiate with representatives of Mexico and with officials from the United States.
According to the agency, “some progress” was made during the Saturday talks between Mexico and Saudi Arabia . However, the fate of the deal is still unclear, as the kingdom insists that the Latin American country accept the quotas proposed to it, delegates said.
“On Saturday, bilateral negotiations still discussed an unprecedented reduction in oil production by about 10%. US President Donald Trump has proposed a diplomatic solution that would allow each participant to save face, but it remains unclear whether Saudi Arabia and other members of the OPEC + global coalition will do. Russia said it considers the issue resolved,” writes Bloomberg.
According to the agency, the new OPEC + video conference will be held on April 12. The Ministry of Energy of Azerbaijan named the same date, RIA reports.
On Saturday, a group of U.S. Republican senators who urged the Trump administration to take a tougher stance on Saudi Arabia held a conference call with kingdom officials to press for a cut in production. Some senators said the US would stop helping Saudi Arabia if that country did not reduce oil production, Bloomberg writes.
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