Maya formula switches amid changing landscape

The long-awaited change to Mexican state-owned Pemex's Maya crude pricing formula finally came this week, as shifting environmental regulations and declining liquidity in select markets threatened to make the decades-old calculation obsolete.

The streamlined formula, to take effect in December after years of discussions, will be based on Argus' assessment of WTI crude at Houston, the Ice Brent contract price and Mexico's K-factor, an adjustment factor set by Pemex according to market or quality conditions.

Argus' WTI Houston assessment makes up 65pc of the new formula while 35pc will be based on the front-month Ice Brent contract price, in addition to the K-factor adjustment.

Had the incoming formula been in place for September and October with the existing K-factor adjustments, the outright value of the crude to the US Gulf coast would have been higher —an average an additional $5.80/bl in September and $5.63/bl more for October to date.

But that theoretical price increase would be lower if the K-factor adjustment under the new formula reflects the price spread between sweet and sour grades, as some market participants said they expect. They believe that the K-factor was used to counteract volatility in high sulfur fuel oil (HSFO) prices in recent months. Sour crudes sell at a discount to sweet crude, which could lead to a negative K-factor.

A long and rocky road

Valero in July said it expected to see a new Maya formula "in weeks." But a new formula has been mulled for years, undergoing several variations this year alone.

A wholesale change in leadership this month at PMI, the trading arm for Mexico's state-owned Pemex, increased market uncertainty over the long-awaited formula change as it brought the company closer to the government. But it may also have been a catalyst for the formula change.

Mexico's new formula notably moves away from a HSFO component at a time of volatile prices amid looming International Maritime Organization (IMO) regulations that take effect on 1 January that limit sulfur content in fuel.

Higher September K-factors announced before a rally in HSFO prices vastly narrowed the heavy sour crude's September average discount to prompt-month WTI Houston — even taking Maya to a premium over WTI Houston on three occasions.

The HSFO component was included in the outgoing formula because of the crude's then-roughly 38.6pc HSFO yield. At a 21°-22° API and 3.4pc sulfur, the crude is among the most sour in Latin America.

The revamp also drops two US Gulf coast grades with falling liquidity and which do not represent prices at the region: West Texas Sour (WTS) and Louisiana Light Sweet (LLS).

WTS, while representing a sour grade, has been on a years-long liquidity drop and is consumed mostly inland in Midland, Texas, and in the midcontinent. WTS has not been reported trading above 100,000 b/d since the December 2015 trade month.

A similar liquidity problem has plagued LLS. The small amount of LLS that does trade is a function of regional supply and demand, dictated in large part by the Louisiana refiners that still run the blended grade. Traded volumes in the October trade month fell below 60,000 b/d — the lowest this year and the fifth time that transacted volumes have failed to surpass the 100,000 b/d mark this trade year.

Sweet surprise

Some market participants said they were surprised at the use of a primary and secondary light sweet benchmark rather than a component to reflect a heavy sour crude. But the K-factor is expected to reflect the spread between sweet and heavy sour crude.

It is unclear how this will be determined as quality difference even among sour crudes greatly effect their prices. But some said that PMI could look at US medium sour offshore Mars, which boasts higher liquidity and is fairly representative of prices at the US Gulf coast. In the October trade month, traded volumes of Mars rose to 346,210b/d, up from 345,460 b/d a month earlier. In 2019, Mars reported trade volumes have moved as high as 473,350 b/d during the July trade month.

The formula change comes as Mexico's crude production has become increasingly heavy. The country has largely tapped its lightest and most prolific fields and wants to keep its remaining light supply to feed domestic refineries rather than import light crude.

Mexico's state-owned crude exports comprise solely Maya, Altamira and Talam, but the three are reported simply as Maya. Pemex exported 8.4pc less crude in August at 1.08mn b/d.

A majority of exports in August, about 58pc, were routed to destinations in the Americas. Another roughly 15pc were sent to Europe, and the remaining were sent to Asia and other regions.

The percentage split is not atypical and may reflect volumes locked in by contracts as well as the complexity of regional refinery system and their ability to process heavy sour crudes.