Mexico To End 75-Year State Oil Monopoly‏

The Mexican congress on Thursday approved a bill which will end 75 years of state monopoly over Mexican oil production.

The aim of the deal is to reverse an eight-year trend of declining oil production and export.

Market reacted by sending oil prices lower, however, the agreement should not have any significant effect on oil prices in the short run.

Although it will, over the coming years, add to the downward pressure on oil prices from the positive supply shock which has hit the global oil market.

On Thursday, Mexico’s congress approved a bill that will effectively end the state oil company Petroleos Mexicanos (Pemex) monopoly over Mexican oil production. It is a milestone for the Mexican economy as it ends 75 years of government control over Mexican oil production.

The reform will allow private companies to get a share of Mexico’s oil reserves. Producers will apparently be offered production-sharing contracts or licences on pumped oil and will be allowed to log crude reserves for accounting purposes.

The hope is that the regime shift in the Mexican oil industry will end eight years of declining oil production, and oil exports, and send Mexico up in the ranks among the world’s top oil producers. Mexico is currently the tenth biggest oil producer with a production of 2.9mb/d last year, around 1mb/d lower than the 3.8mb/d peak in 2004. However, Mexico sits on the largest unexploited crude area after the Arctic Circle and the reform of Mexico’s oil industry may therefore unleash this potential. Naturally, this is positive for the Mexican economic outlook.

In terms of the impact on the global oil market, the agreement should not have any significant effect on oil prices in the short run as it will likely take time before private companies’ investments in Mexican oil will start to pay off. However, if Mexico over the coming years manages to return oil production back to previous highs, it will contribute to the downward pressure on oil prices from the current global positive oil supply shock. Hence, the reform is another example of the positive supply effects, led by the US shale oil boom, the persistent high oil price has resulted in over the past couple of years. The market reacted by sending Brent Crude around USD0.5/b lower to USD108.5/b the lowest since late November and WTI Crude down around USD0.3/b to USD97.3/b.

However, as mentioned above, we do not expect the deal to have further impact on oil prices in the short term.

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