NEW YORK (Reuters) - Mexico’s new formula for its oil hedging program and to price its oil export sales now includes U.S. West Texas Intermediate crude delivered to East Houston, a popular U.S. export grade, three sources familiar with the matter said.
Mexico recently launched its annual oil hedging program, Reuters reported last week, to lock in the coming year’s oil-sales revenues against price volatility, in a program that usually costs more than $1 billion annually.
State oil company Pemex sets formulas that dictate the price at which Mexico’s crude is sold worldwide. The country’s flagship oil, Maya crude, makes up most of its sales into U.S. Gulf Coast markets. The formula has historically taken into account oil prices in Louisiana and inland West Texas in order to reflect coastal pricing and U.S. sour crude prices.
Mexico’s finance ministry, in tandem with Pemex, reworked the coming year’s sales formula, because of volatility in high-sulfur fuel oil prices that have generally been a component of Mexico’s exports. That was completed in July, though details have not been made public.
The sources said WTI crude delivered to East Houston, referred to as MEH, was added to the mix because it is a popular, actively-traded grade that serves as the proxy for export barrels on the Gulf Coast, where a majority of U.S. refineries are located.
With more barrels headed to the coast from the Permian, the biggest U.S. oil basin, the Houston market is highly liquid from both a physical and financial perspective, said Michael Tran, managing director of energy strategy at RBC Capital Markets in New York.
The addition of the grade to the formula could alter the cost of Mexico’s hedge and possibly the type of derivative contracts it purchases to cover its exposure.
It was not clear if other components of the formula had been altered, the three sources said on condition of anonymity since they were not authorized to speak to the media. Mexico’s finance ministry and Pemex did not respond to requests for comment.
Other U.S. crude grades that are part of the formula include West Texas Sour crude (WTS) and Louisiana Light Sweet (LLS) crude.
The previous formula, published by Pemex’s trading arm PMI, was last updated in November 2018, according to its website.
PMI has not officially applied the new formula to current Maya sales to the Gulf Coast likely because they are waiting for the Mexican finance ministry’s oil hedge for 2020 to be completed, two of the sources said.
“I don’t think it would take effect for (PMI) sales until January,” one of the sources said.
Mexico will maintain the strategy of hedging its oil output, the government said in its 2020 budget proposal unveiled on Sunday, adding that Pemex would also continue a similar but separate hedging program.
Reporting by Devika Krishna Kumar in New York; Additional reporting by Marianna Parraga, Stefanie Eschenbacher and Ana Isabel Martinez in Mexico City; Editing by Tom Brown