The Maya oil discount has been broadening for the past few weeks because of the continued sharp widening of the WTS (West Texas Sour) differential as the bottlenecks in the Midland Basin have not abated.

The differential has widened by more than $12 per barrel (bbl) this year and accounts for 40% of Maya pricing, which is formulaically determined by Pemex, the Mexican state-owned oil company, said Paul Cheng, an equity analyst for Barclays.

Since Pemex is allowed to adjust pricing by $1.9/bbl per month for Maya, which is a heavy sour crude produced in Mexico and serves as the heavy oil benchmark along the Gulf Coast, the Maya differentials could remain elevated for the next several months.

“The company is permitted to make larger changes with special permission from the board,” Cheng said. “We would not be surprised to see Pemex interject and increase the Maya ‘K-factor’ by more than the normal maximum of $1.9/bbl in an effort to expedite the narrowing process.”

While Western Canadian Select (WCS) prices are often quoted as a discount to West Texas Immediate (WTI) at Cushing, the marginal barrels are actually cleared in the U.S. Gulf Coast and trades against Maya, Cheng said.

WCS, the heavy crude oil in Canada, is trading at an “incredible low of $41 a barrel; a $23 a barrel discount to Mayan crude,” said Dan McTeague, a senior petroleum analyst for GasBuddy.com, a Boston-based provider of retail fuel pricing information and data.

The causes of the large spread are existing pipeline constraints and competition to sell to Gulf Coast refiners, said McTeague.

“Conceivably, the large WCS discount of $2/bbl on May 30 makes it more attractive than Mayan heavy,” he said. “Canadian oil is making it to the Gulf Coast and this could be putting pressure on the heavy Mexican blend.”

Under normal market circumstances, the Maya discount should be narrowing and not widening by such large margins, Cheng said.

“This is more driven by the mechanics of the pricing and not the fundamentals of the light/heavy differential,” he said.

The current geopolitical situation has affected the Maya discount as production is collapsing in Venezuela, which is a major heavy oil producer, Cheng said. The cutbacks in production mandated by OPEC are another factor which has disproportionately taken out the supply of heavy and medium sour grades of oil.

Since heavy- and sour-grade crude oil tends to be the least profitable barrels within their portfolio because they trade at a discount, the operating cost tends to be higher, he said.

The problem with Maya is that it is sour and while the refiners need more heavy blending stock, the sour (sulfur)-rich Maya only adds to the strain refineries face, said Patrick Morris, CEO of New York-based HAGIN Investment Management.

“Mexico holds back the majority of its lighter sweeter grades for use in their own refineries,” he said. “With ultralight already limiting refining capacity in the middle distillates, the addition of heavy sour from Mexico would not make the problem any better.”

Most of the U.S. Gulf Coast refiners will benefit from a depressed Maya and/or WTS pricing, but Valero Energy (NYSE: VLO) has significant Gulf Coast exposure to Maya and is a “notable beneficiary,” Cheng said.

The Maya oil discount increased by $4.50/bbl to more than $12/bbl (17% of LLS) this year and widened by more than $1/bbl, according to a May 11 Barclays research note.

Maya prices are set by a formula of the following: 40% WTS + 40% #6-3% sulfur-fuel oil + 10% LLS + 10% Brent + K-factor. The K-factor is a market balancing factor that is set by Pemex once a month, “early in the month prior to the pricing month and can only be adjusted by a maximum of $1.9/bbl during each pricing period,” he wrote.

What’s likely to occur is that the wide WTS spread will continue to persist for the next several months and hamper Maya prices even more. In the near-term, the Mars spreads of medium sour crude may widen more.

“Despite wider Maya and WTS spreads, the LLS/Mars differential remains quite narrow at just about $3.50/bbl or roughly 5% versus the long-term average of about 6.5%,” Cheng wrote. “We believe the attractive Maya/WTS discounts could shift demand away from Mars and widen the discount over the next few months.”

The discount is returning to about where it was back in the 2012 to 2014 timeframe—the so-called boom years—when there were also takeaway capacity issues in the Permian Basin, said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University's Cox School of Business in Dallas.

Maya only plays a role in production on the margin. Another important factor that investors should recognize is that Mexico’s crude oil production has been steadily declining for some time, especially in the Cantarell field where a good portion of Mayan crude is produced, he said.

“On the margin, it helps as a number of U.S. refiners have invested heavily in coking operations and other technologies to process heavy crude and being able to buy it at a discount gives them an advantage,” Bullock said.

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