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Mexico - opportunistic cutter

Mexico will probably end up losing more oil supply in 2017 than it pledged to cut

Mexico is in the midst of a major energy-sector overhaul that the country hopes will significantly boost its oil production. So why did it agree in Vienna to cut oil supply?

Mexico had everything to gain and nothing to lose by hopping aboard. Its pledge was significant too-a 100,000-barrels-a-day drop in the early part of 2017. Aldo Flores-Quiroga, Mexico's deputy secretary for energy, was there to add some credibility to the commitment.

The cuts-and more-were already coming, and not voluntarily. Mexico's Opec-endorsed production target is part of an output drop that was already announced in November. This expects the country's average annual production to fall by 215,000 b/d in 2017, to 1.94m b/d in 2017.

Production declines at the country's ageing oilfields are accelerating as state oil company Pemex slashes investment. So while the market will keep a beady eye on the compliance rates of other signatories to the Opec deal, Mexico's cuts are baked in. This year could be the first since the late 1970s that sees Mexico's oil output fall below 2m b/d. Dressing that decline up as voluntary cuts was significant for the Opec deal-but only politically, not in terms of barrels that were going to go missing anyway.

Mexico is already cashing in on the deal. The petrodollar-dependent national treasury is seeing a bump in oil revenues and Pemex has gained a much-needed boost in cash flow. Oil's 15% price rise since the deal will, if it lasts, lead to almost $300m a month more income from the country's crude exports.

Piggybacking on the deal will also be a boon for Mexico's historic oil opening. Investors won't fret that the country is suddenly a de facto member of Opec, prepared to crimp their output. They understand the cuts-cum-declines were already coming-and from Pemex's fields. But the post-deal rally and prospects for higher prices will give investors more confidence as they bet on Mexico's upstream opening. Just days after the Opec deal was announced, Mexico enjoyed a resounding success in its deep-water licensing round, a crowning achievement of the reform process so far. The outcome could have been different had Opec failed to reach a deal and pulled the rug out from under the oil price.

Still, Mexico's cooperation with Opec should be seen as an opportunistic and short-term one-off, not a change in policy direction. In a statement, the country's energy ministry said that it still planned to move full steam ahead with its reforms, including several planned bid rounds over the course of early 2017. The goal of the country's energy policy remains attracting foreign investors and recovering its former glory as a major and growing oil producer. The inherent tension in Mexico's decision to join Opec production cuts is that it did so only because it hopes the deal will lift prices and help its own efforts to increase output. Investors and the market shouldn't ignore that.

This article is part of a report series on Opec. Next article: Venezuela on the precipice

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