Summer went out with a bang for US refiners. Following the barrage of wind, rain and flooding brought on by four consecutive hurricanes, nearly a third of all US refining capacity was knocked out–including major pieces of the infrastructure required to deliver fuels to end markets. In this issue of Market Update, we’ll discuss supply chain recovery, regulatory concerns in Mexico, and the opening of Zones 3, 4 and 5.
Fuel Pricing Recovered From Summer Storms
After nearly a month of recovery, US Gulf Coast refiners have returned to normal levels of utilization. Colonial Pipeline is flowing and the ports up and down the coast are open for business. However, temporary disruptions resulted in panicked consumer buying, long lines at the pump, product shortages and higher prices.
Diesel and gasoline prices jumped 30-50 cents per gallon overnight. As supply has caught back up with demand, rack prices have slowly eased back down and are near pre-storm levels. On the retail side, consumers are still waiting to see pump prices reflect the correction. South of the border, Mexico put in place price ceilings and was able to temporarily source fuels from other markets. With a return to normalcy along the USGC, the steady flow of refined products from the US to Mexico has resumed without a hitch.
It’s Not Just Gasoline & Diesel
Volumes of ethanol flowing from the US to Mexico are riding the brakes in anticipation of future regulation. When NOM-016 was modified earlier this year, it allowed much of Mexico (Mexico City, Monterrey and Guadalajara being the exceptions) to consume gasoline blended up to 10 percent with ethanol, up from 5.8 percent previously. A Mexican court recently issued a temporary injunction on the 10 percent allowance. A decision is expected this week on what the blending standard will be for ethanol content.
Base oils and lubricants are also reacting to US/Mexico market conditions. Imports from the US hit an all-time high in July at more than 700,000 barrels. With the well documented problems and outages within the Mexican refining sector, domestic supply plummeted to essentially zero. Meanwhile, US production exceeded 6 million barrels as Group II production has continued to expand. Exports from the US now exceed 4 million barrels.
The Home Stretch
Price liberalization for transportation fuels is set to continue with Zone 3, located north and west of Mexico City, opening on October 30. That will leave Zone 4, the central portion of the country and Mexico City, and Zone 5, representing the Yucatan Peninsula, to open November 30 and December 31, respectively. So far pricing deregulation has been introduced in accordance with calendar targets and the markets have responded well with minor pricing adjustments.
On the infrastructure side, the market is still awaiting the second open season for PEMEX Logistica assets. Originally set for the first half of 2017, space in PEMEX owned terminals and pipelines has not yet been auctioned for Region 2 comprised of Chihuahua, Coahuila, Nuevo Leon, Tamaulipas and Durango.
The next few weeks will serve as an indicator for the future of the Mexican market: Will Zone 3 open as seamlessly as Zones 1 and 2? What will the court decide regarding ethanol? With the export market continuing to thrive, American firms have a lot of reasons to be excited about the future of Mexico. We remain bullish, and expect that ongoing regulatory questions will not serve as a hindrance to future growth.
All the best,
Senior Vice President of Terminal Operations