MEXICO CITY, (Reuters) – Prices of key Latin American crude grades plunged this week following the crash in benchmark crude futures, aggravating an already-weak market that has seen very few spot sales throughout April, traders told Reuters yesterday.
Brent crude futures plunged 25% on Tuesday to their lowest level in nearly two decades, a day after panicked traders sent U.S. West Texas Intermediate oil to minus-$40 per barrel because of a massive supply glut and a 30% collapse in demand due to the coronavirus pandemic.
As physical U.S. crude grades fell into negative territory for the first time in history, Mexican, Ecuadorean and Venezuelan grades indexed to them, including Mexico’s Maya, also traded negative for the first time. Heavy volatility has caused traders to back away in recent weeks, effectively shutting down trading in key regional grades.
Latin America exports some 5 million barrels per day (bpd) of mostly heavy crude, with its largest buyers in the U.S. Gulf Coast. About half of its sales are through long-term supply contracts, while the other half are through spot trades on the open market.
The heavy grades are suited for refining into diesel, which saw higher consumption than gasoline early in the pandemic because trucking deliveries continued even as consumers stopped driving. However, diesel inventories have been rising of late in the United States as demand has dropped.
“We are seeing more rational numbers today, but it is a matter of time before WTI June contracts also crash,” a trader of Latin American oil said. U.S. June WTI fell to $11.57 a barrel on Tuesday.
Mexico’s oil export basket, which includes Maya heavy crude and other exportable grades, closed at -$2.37 per barrel on Monday. Maya crude delivered to the U.S. Gulf Coast is indexed to WTI delivered to Houston <MEH->.
Many crude traders are now wondering how to negotiate payments if a contract ends up with a negative sale amount, meaning the supplier has to pay the buyer to take the oil. One trader said many sellers have recently adopted clauses saying prices paid cannot be less than 10 cents per barrel.
Spot sales of Venezuela’s flagship Merey crude, which after reformulation is now indexed to U.S. Mars crude <WTC-MRS>, Brent and Middle Eastern grades, are being offered at only $1 to $2 after trans-shipping fees off Malaysia, its most active spot for re-selling, traders said.
Venezuela’s prices have steadily dropped in recent months after state-run PDVSA was forced to increase discounts to intermediaries because fewer companies want to buy from the nation due to tightening U.S. sanctions.
With demand collapsing due to the coronavirus crisis, the Organization of the Petroleum Exporting Countries, along with Russia and others – a grouping known as OPEC+ – are due to start cutting supply by 9.7 million bpd on May 1.
Venezuela President Nicolas Maduro said he would be speaking with OPEC Secretary-General Mohammad Barkindo on Tuesday night. “We are waiting for the OPEC-plus and G20 agreement to enter into force on May 1,” Maduro said during an appearance on state television.
Ecuador’s Napo heavy crude for June delivery was trading on Tuesday at $6 per barrel below WTI, while Oriente medium crude was at around $4 per barrel below WTI, meaning final spot prices of $6 to $9 per barrel. Those two grades are indexed to U.S. West Texas Intermediate futures.
Colombian and Brazilian crudes have remained positive, in the range of $9 to $15 per barrel, as they are indexed to Brent.
Tenders launched in recent weeks to sell Argentine and Ecuadorean crudes on the spot market for May and June delivery were canceled due to low prices and lack of interest from buyers, particularly in the U.S. Gulf Coast, the traders said.
Ecuador’s crude exports will remain under force majeure at least until the end of April following a landslide that left two of the country’s pipelines out of service.
