Forget OPEC, Look to Mexico for Oil Profits

Reality can be a very bitter pill to swallow for some people.

For today’s oil companies, it’s even worse. Low prices have plagued the industry for more than a year and a half, leaving the sector decimated. And while drillers have been slashing budgets and idling rigs, crossing their fingers and praying that a mountain of debt doesn’t bury them for good, there are actually some players with more to lose.

For some, like Mexico, things have been bad for a long, long time.

There were good times, too.

Back in 1972, a persistent, disgruntled fisherman named Rudesindo Cantarell kept hounding Pemex about an oil stain until finally they sent a few men to check it out. That, of course, led to the discovery of one of the largest oil fields in history.

Those were the good days, when a super giant oilfield (the Cantarell oil complex actually consists of four fields) fell into your lap by happenstance.

And it would have been utter foolishness to think that good fortune would last forever.

Not only did output from Cantarell peak in 2004 at 2.1 million barrels per day, but the backside of the curve has been nothing short of ugly. By 2013, just nine years after peaking, Cantarell’s output had plummeted nearly 80% to 440,000 barrels per day.

When petroleum products and natural gas make up around 85% of your country’s total energy consumption, losing your ace-in-the-hole can have a devastating effect.

It’s not all doom and gloom, however, because the downfall of Mexico’s oil industry will lead to more than a few interesting opportunities.

Reality Bites, But Doha Ignites

Look, Mexico isn’t a special case; I’ll try not to pick on it too much.

And perhaps more than anyone else, Pemex execs will be waiting for Doha and crossing their fingers. Yet it’s not simply an “output freeze” that does the trick.

What we need is a cut.

And here’s where things get a little sticky.

Even though the world’s biggest oil producers are ready to finally sit down and agree to slash output, it has to be done together.

Besides, I mentioned last week that simply freezing output means they’re still producing at nearly full capacity. Saudi Arabia is one of the few countries, excluding Iran and Iraq, that can actually increase production at this point.

And keep in mind that the Saudis need oil prices in excess of $90 per barrel to balance their exorbitant government spending.

Don’t get your hopes up too much.

Don’t Trade the Headlines

Do yourself a favor… don’t trade on news headlines.

Ever.

When OPEC released its monthly oil report, it suggested that demand for its members’ crude was heading lower than it previously thought.

But considering how often these forecasts are revised, you have to wonder who keeps crunching the numbers here.

You’re almost better off sticking to tea leaves… almost.

It doesn’t matter how optimistic you are regarding an oil recovery. Barring another stroke of luck by Mexican fishermen, nothing is going to rescue Pemex.

And now that the U.S. oil export ban is a thing of the past, things are about to get very interesting.

For the last six years, Mexico’s dependence on the United States for its petroleum and natural gas has been growing.

Click Chart to Enlarge

Companies like NuStar Energy (NYSE: NS) have positioned themselves not only for Mexico’s need for more U.S. petroleum, but also for the re-emergence of oil exports.

Both catalysts are now in play.

In fact, Mexico’s energy reforms are paving the way for even more fuel imports. Before, only Pemex was allowed import fuels. Soon, private companies will also have the opportunity to import gasoline and diesel.

Naturally, that also puts drillers in South Texas’ Eagle Ford Shale in a prime spot. With its close proximity to Gulf ports, crude is already flowing out of the U.S. In fact, it was NuStar and ConocoPhillips that loaded and sent the first shipment of crude out of Corpus Christi.

That’s just the beginning, and it’s not just pipeline companies like NuStar that’ll reap the benefits.

I’ll tell you all about another one next week.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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