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2014-10-29 18:50:00

MEXICO: OIL PRICE FALLING: $79/BBL

MEXICO: OIL PRICE FALLING: $79/BBL

Mexico is poised to redraft part of next year's federal budget after a steep fall in oil prices upended the country's revenue assumptions.

The third-largest oil producer in the Americas, Mexico is highly dependent on oil exports, which were valued at $42.7bn in 2013. One-third of the federal budget is funded by oil revenue.

The finance ministry said in a statement that a new oil price target had been set at $79, which is $3 per barrel lower than the government's estimated price in the budget package and $2 lower than the target approved by the Chamber of Deputies on October 16.

"These differences derive from the evolution of oil prices and the price of oil futures contracts in the days after the approval . . . in the Chamber," the ministry said.

Looming oversupply and concerns over growth in China, the world's second-biggest petroleum consumer, have pushed oil prices down sharply since June. Mexico's main crude stream, known as Maya, was on Monday selling for $75.12 per barrel delivered to the US Gulf of Mexico coast, according to Argus Media.

The swift decline in oil prices earlier this month disrupted Mexico's annual hedging programme for crude exports, the largest of its kind in commodity markets. Every $1 fall in the price of oil costs Mexico some $300m, according to Marco Oviedo, chief economist at Barclays in Mexico City.

"We have a meeting to redraft the income law [part of the 2015 budget package]. The oil price at $81 is unsustainable," a senior congressional source told the Financial Times.

The revised income law, with a new oil price target, must be passed by both the Chamber of Deputies and the Senate. The Senate was expected to vote on it on Wednesday and the lower house on Thursday, this person said.

Mexico's moves come as international oil prices also head lower. The US oil benchmark, West Texas Intermediate, fell as much as 2.2 per cent to $79.44 on Monday before settling virtually unchanged at $81 per barrel.

Goldman Sachs forecast lower oil prices in 2015 and traders nervously eyed a wave of selling from commodity index investors. The investment bank said Opec would wait for evidence of a slowdown in US shale production growth before meaningfully cutting production.

"While we still believe Opec will remain a swing producer, it will no longer act as first-mover," Goldman analyst Jeff Currie said, arguing lower US shale oil production was now required to balance the global oil market.

Mark Albers, senior vice-president at ExxonMobil, told a business conference in Querétaro that falling prices would not deter investors in Mexico's energy reforms.

Mexico is opening up the sector, which has been closed for nearly eight decades, to private investment. Tenders start next year and the government expects some $50bn of private investment to flood in by 2018.

"I wouldn't rule out any resource type based on today's prices – it's a longer term view than that," Mr Albers said.

ft.com

Tags: OIL, PRICES, MEXICO, OPEC, EXXON